- Are Successive Generations Getting Wealthier, and If So, Why?Evidence from the 1990s
The 1990s were a remarkable decade for saving and wealth accumulation. After averaging 3.4 times GDP between 1950 and 1990, aggregate net worth rose from 3.5 times GDP in 1990 to 4.2 times GDP in 2000, its highest level since at least 1950. In nominal dollar terms, net worth rose from $20 trillion in 1990 to $42 trillion in 2000. Much of the increase in wealth was fueled by skyrocketing capital gains in the stock market, which helped boost the aggregate market value of equities from $3 trillion in 1990 to $15 trillion in 2000. The decade also saw widespread diffusion of stock ownership (directly and indirectly through mutual funds) and substantial increases in participation in and contributions to defined-contribution pension plans, typically 401(k)s. At the same time, however, the measured [End Page 155] saving rate, excluding capital gains, fell over the decade, continuing a longer-term pattern.1
These patterns created a rich environment in which to examine household saving and wealth accumulation. Previous researchers have followed particular birth cohorts through the 1990s, separating the wealth changes that each cohort experienced into a component due to capital gains and a component due to active saving. These studies aimed to develop estimates of the age-wealth and age-saving profile, and to determine among which birth cohorts and among which types of assets wealth rose and active saving fell during the 1990s. Other studies have examined the extent to which households chose to use their accumulated capital gains in the 1990s to finance increased consumption expenditure or early retirement.2
This paper also focuses on the 1990s but addresses a different set of questions and thus takes a different approach to the data. Unlike previous studies, ours does not focus on tracking particular birth cohorts through time. Instead we examine the relative wealth status of different birth cohorts as they reach similar stages of the life cycle. Thus, for example, we compare (using data from the 1989-2001 Surveys of Consumer Finances) the 2001 wealth of households where the head was between the ages of 65 and 74 in 2001 with the 1989 wealth of households where the head was between 65 and 74 in 1989. The idea behind this type of comparison is to exploit the fact that households of a given age in 1989 had not experienced the 1990s, whereas households of the same age, observed in 2001, had. Thus, by controlling for other factors that may vary across generations-such as educational attainment, marital status, health status, and differing work norms for women-we can measure the effects of exposure to the 1990s on saving and wealth. [End Page 156]
Our approach can provide insights regarding three questions: To what extent are successive generations of American households wealthier than their predecessors? What are the principal determinants of the trends in wealth across successive generations? And what are the implications? The answers to the first two questions turn out to be surprising and simple. The answer to the third is more complex.
We find that the rise in aggregate net worth over the 1990s (that is, the rise in net worth in 2001 relative to 1989) accrued almost entirely to older age groups. Older households (those with heads aged 55-64, 65-74, or 75-84 years) in 2001 had significantly more wealth than did similarly aged households in 1989. For example, real median wealth among 65- to 74-year-olds in 2001 was about $100,000 (60 percent) greater than among 65- to 74-year-olds in 1989. For these older households, economically and statistically significant increases in wealth occurred at almost all points in the wealth distribution and across all major wealth categories: retirement accounts, other financial assets, housing equity, and other real assets. In contrast, the typical younger household (aged 25-34, 35-44, or 45-54) in 2001 did not have more wealth than a typical younger household in 1989.
We also show that, despite the large capital gains, the rapid diffusion of stock ownership, and the significant...