Downward Mobility Is Stalking The Baby Boomers

Economists have long been concerned about Americans' sluggish wage and income growth in recent decades. But a related development has received less attention: the decline in household wealth accumulation experienced by baby boomers compared with the levels of wealth achieved by their parents. This trend is examined in a new Urban Institute book, The Economic Future of American Families, by Frank Levy and Richard C. Michel.

Wealth, of course, is a basic source of a family's emotional and economic security. Savings and other assets can fund future needs, such as children's college education or uncovered medical bills. They provide a cushion against unemployment and other economic adversity. And, most important, they are a key determinant of the living standards enjoyed by Americans after they retire.

The slowdown in wage growth is an old story. After rising at a 2.5% to 3% annual clip in the 1950s and `60s, average family incomes, adjusted for inflation, actually declined in the `70s--even though the trend toward two workers per household accelerated sharply. And although average real incomes of families expanded at a modest 1.5% pace in the post-recession `80s, growth was largely confined to the upper 20% of families, with most households just keeping pace with inflation.

Meanwhile, real net wealth per family expanded at only a 0.4% rate in the `70s and early `80s--one-sixth of its growth rate in the `50s. More important, much of the growth in recent decades accrued to mature households. This group already owned homes when housing prices took off in the 1970s, and they also profited from low fixed-rate mortgages and from rising interest earnings on their savings. By contrast, most baby boomers not only faced high home prices and mortgage rates but also experienced low wage growth--limiting their ability to accumulate wealth and buy homes.

The result is that baby boomers own fewer assets than their parents did at similar points in their lives. Levy and Michel estimate that those in the 35-to-44 age group are little more than half as wealthy as their parents' generation was and that the gap is likely to widen as they approach retirement (chart).

Since home equity is the biggest source of family wealth, the subdued outlook for the housing market does not bode well for baby boomers. At the same time, the increased life expectancy of older Americans and their rising medical costs suggest that baby boomers cannot count on substantial inheritances to boost their wealth.

All of this implies that baby boomers must save a lot more and consume less if they are to enjoy their retirement years in reasonable comfort. Levy and Michel suggest that the government publish guidelines on desirable savings levels and create tax incentives to encourage such behavior.