Guest post: Intergenerational wealth

There may be less for the next generation than they expect.

And it won't fix the U.S. deficit problem.

Some Boomer parents invested in Nvidia. Others invested in Worldcom, Enron, or Lehman Brothers. Some Boomer parents live in memory care too long, and it eats up everything they ever saved. Some Boomer parents never earned all that much. President Trump could plunge the world into a world war, a depression, hyperinflation, civil war, or something else, so even people who have provided for their retirements could run out of money. Lots could go wrong.

While at my college's 55th reunion of the class of 1971, I am presenting guest posts by classmates so that I would have my mind and time free to remember those days and places of my youth.

Here I am in 1967, age 18

Erich Almasy rowed at college, went to Harvard Business School, then had a long career on the consultancy/business management track. He and his classmate wife, Cynthia Blanton, live in Mexico.

Almasy at graduation

Almasy, recent

Guest Post by Erich Almasy

The Myth of Intergenerational Wealth 

For generations, the idea of “leaving something behind” has become deeply embedded in the American psyche. Financial advisors promote it, politicians praise it, and family dynasties flaunt it. The financial investment industry touts the massive inflow of intergenerational wealth, mostly from Boomers, over the next 25 years as The Great Wealth Transfer. Estimates range from $110 to $124 trillion (with a “t”), comprised of real estate, insurance, investments (including capital gains), retirement accounts, and charitable bequests. 

 

Is the “Bubble” Real?

Many factors are presently reducing this transfer, among them:  

Boomers are living longer and spending their money on healthcare and longevity.

The median cost of long-term assisted living is over $6,000 per month. Healthcare, even with Medicare, costs people over 75 about $25,000 annually. Boomers also need to plan for inflation, and they might want to travel.

Family farms and businesses are often illiquid and harder to move directly into transferable wealth.

Much of this wealth was accumulated during the 70s and 80s, a period of high inflation that significantly increased asset values. If, as some analysts believe, we are heading into a deflationary cycle, it may be reduced.

Most of the wealth is already tied up in family estates. Over 75 percent of the projected transfer can be found with families in the top 10 percent of income, tied up in generation-skipping and living trusts.

 

Where’s It Hiding?

Well, with rich people mostly who protect it from taxes. On top of their trusts and shelters, the top 1% added a benevolent Republican Congress that slashed their capital gains taxes. Capital gains are now capped at 20% with exemptions, the lowest level since the 1920s (and we know what happened then). Inheritance/estate taxes have been largely eliminated. Initially, federal taxes on inheritance/estates were used temporarily during times of war -- 1797, 1862, and 1898 -- funding through a stamp paid for registering wills. In 1916, the federal estate tax became permanent, with rates that rose to 77 percent by 1975. Under George W. Bush, the tax was eliminated. It was restored under President Barack Obama, but later exemptions (~$14 million per individual and ~$27 million per couple) meant that very few estates paid any tax, and the top rate is now capped at 40%. But the most significant tax-saving wealth-creator for the rich has been the “carried interest loophole,” which allows anyone involved with investment funds to treat their performance-based compensation as long-term capital gains, reducing their top federal tax rate from 37% to 23.8%.

 

Cui Bono

In the immortal words of Cicero - “who benefits?” Well, not you and I. The federal deficit averaged under 4 percent of GDP for the past 50 years. Today, it is 5.8 percent, expected to rise to 6.7 percent by 2036. The government will add $1.9 trillion to the deficit this fiscal year, bringing the total to $39 trillion. The deficit is growing faster than tax revenues. And this omits future unfunded liabilities, separate from the annual deficit. Social Security has an estimated $25 trillion in long-term unfunded liabilities, and Medicare another $53 trillion. Put more personally, the annual interest payment on the national debt amounts to $7,300 per family. I don’t expect another Ted Turner to come along and pay $1 billion to reduce the federal deficit, as he did for the United Nations.

 

Net Net

The deficit plus unfunded liabilities total $117 trillion, remarkably close to the amount of future intergenerational wealth transfer. Most of that $110-$124 trillion is controlled by high-income families and, as we have seen, it does not “trickle down." Charitable giving has not increased under the “Tech Bros.” Adding trillions to inherited estates will not cause greater investment in American infrastructure or pay off our national debt unless federal tax law changes. The modern obsession with creating “generational wealth” may also overlook a deeper truth: Is this wealth raising capable, decent human beings who have a viable future? 

 

 

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