Americans born in the early 20th century who weathered the Great Depression, won World War II and birthed the Baby Boomers, have often been referred to as the “Greatest Generation”—referencing a best-selling book of the same name written in 1998 by Tom Brokaw. The Greatest Generation was projected to make one last imprint on American history: Through their productivity and thrift, the Greatest Generation, as a group, would leave the greatest inheritance in recorded history to their Boomer children.
When the conversation about the coming Greatest Wealth Transfer Ever began about a decade ago, Baby Boomers couldn’t help but see this predicted event as a potential windfall. These generous inheritances would be a “bailout” for their own lagging retirement savings, and settle their extensive borrowing. Having given birth to the Baby Boom generation, the Greatest Generation would now fund its retirement. Almost too good to be true…
A June 11, 2012, Wall Street Journal article by Anne Tergesen, Counting on an Inheritance? Count Again. begins: “For a growing number of boomers, things aren’t going according to plan. The post-war generation is living longer—and many are spending their savings along the way. And, of course, many of them also took a hit in 2008. The result is that, as a group, boomers likely won’t be getting as much of an inheritance as they hoped. Even worse, far from receiving a bequest, a growing number are tapping some of their own savings to help their cash-strapped parents make ends meet.”
What happened? And how did it happen so fast? Has the Greatest Wealth Transfer Ever (GWTE) vanished?
The greatest impact has been demographics. And demographics are strong determinants of long-term economic outcomes.
The obvious demographic indicator is: the Greatest Generation substantially exceeded the life expectancies of the preceding generations. As Tergesen states, this means some would-be inheritances are either delayed or consumed. Consumption of accumulated wealth is often accelerated by longer life spans, because living longer today usually entails significant medical and healthcare expenses at the end of life.
The wealth creation associated with the Greatest Generation was built on expansion, particularly of the population. During the period prior to World War II, the national fertility rate had been declining, due largely to the economic distress of the Great Depression. The national fertility rate during the pre-war years was 2.3 (i.e., American women of child-bearing age averaged slightly more than two children). During the Baby Boomer period (roughly 1946-1964), this number increased to nearly 3.5. But the Baby Boomers have not reproduced like the Greatest Generation—and neither have the generations that have followed them.
A February 16, 2012, USA Today article, citing the Population Reference Bureau, found “The U.S. population is growing at the slowest rate since the Great Depression,” and that the U.S. fertility rate “is estimated to have fallen to 1.9.” This drop below the replacement rate of 2.1 is attributed to the recession, and is expected to inch up slightly. But it is a far cry from the expansive birth rates of five decades ago. Population demographics in the United States have changed.
And if the demographics have changed, it means many of the financial assumptions will have to change as well. Need confirmation of the necessity of a new financial perspective? Look at the European Union. Aging, stagnant populations cannot support their country’s social programs, pay their national debts, or expand their economies.
Bringing the impact closer to home, fewer American workers today have institutional “automatic” programs for financial security. Two of the three legs of the Greatest Generation retirement stool—Social Security and pensions—are wobbly or vanishing for the Boomers and successive generations.
The most effective responses to these demographic-influenced changes are at an individual level. By their sheer size, governments and large corporations are often slow to adjust to changing paradigms, but individuals don’t face the same restrictions. While the details will vary with individual circumstances, there are general ways in which changing demographics may reshape your financial perspectives.
If you want an inheritance or a retirement fund in your financial future, you will have to plan for it. You can’t expect to work 30 or 40 years, then stroll down to Human Resources at age 65 and say “So, what are my retirement options?”
Beyond taking greater responsibility, the new demographics may fundamentally alter many important long-term financial decisions. The biggest change: that most Americans will work longer. Changing demographics will influence your choice of retirement accumulation formats. And addressing the medical expenses and living arrangements of aging family members will require greater financial attention.
The economic impacts of changing demographics are slow-moving but inevitable. For aware individuals, these trends can present great opportunity. In contrast, those who persist on operating from old assumptions based on the demographics of the past are exposing their financial futures to greater risk.
Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS).
By Elozor M. Preil