Factors Reducing Boomers' Great Expectations
December 27, 2000
It has been assumed over the past few years that the Baby Boom generation -- those born from 1946 to 1965 -- would inherit $20 trillion or so from prior generations, and that sizeable sum would function as a major supplement to their own retirement savings.
Well, according to economists Jagadeesh Gokhale and Laurence Kotlikoff, in a commentary for the Federal Reserve of Cleveland, the actual worth of this windfall has been wildly exaggerated.
- First, the bequest pie must be split among more people because each boomer has a relatively large number of siblings -- in 1960, the ratio of people aged 35 to 45 to those aged 60 to 70 was 1.8; today, the ratio of boomers to parents is 2.3.
- Second, since World War II, the resources of the older generations have become increasingly annuitized -- that is, private defined-benefit pension plans, Social Security, Medicare and private insurance annuities provide an income flow to seniors that ceases when they die -- in 1960, among males over 65 years, approximately 16 percent of their financial resources were annuitized; in 1990, that figure had grown to 41 percent.
- Third, older people are spending down their assets at a faster rate than their predecessors -- in 1960, retirees consumed from 6 percent to 7 percent of their financial resources a year; in 1990, that had doubled to 12 percent to 14 percent.
- Fourth, people are living longer, so the boomers' parents will have even more time to spend down their assets.
And because fewer parents live in households with their children, and families have been increasingly fragmented due to divorce, the bequest ethic may be fading -- the percentage of households in the 1990s who thought it was important to leave an estate declined from 52 percent to 48 percent.
Source: Editorial, "Inherit the Wind," Wall Street Journal, December 27, 2000.
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