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The Greatest Wealth Transfer in History Is Here. Who Will Benefit?

New York Times reporter breaks down the economics of the upcoming generational wealth transfer.

Our guest on The Long View is New York Times economics reporter Talmon Smith, who is giving his insights into the economy, inflation, wealth inequity, and more.

Here are a few excerpts from Smith’s conversation with Morningstar’s Christine Benz and Jeff Ptak:

The Greatest Wealth Transfer in History Is Here, With Familiar (Rich) Winners

Christine Benz: Yeah, that’s good food for thought, and it’s a good segue to the main topic that we wanted to discuss with you today, which is this in-depth piece that you wrote for the Times in May, where you looked at the enormous amount of wealth that will transfer from baby boomers to their children and grandchildren over the next couple of decades. Some of that will be housing wealth. So, before we get into that story, can you just talk about why this is happening? Why have baby boomers done so well?

Talmon Smith: Baby boomers just sort of hit the jackpot in terms of timing of when they were born. Of the 73 million baby boomers, they were mostly born in the midcentury, in the heart of midcentury, as U.S. birthrate surged, as there was this huge leap in prosperity after The Depression and World War II. Boomers had the great timing of getting into the housing market at the time where the government creation of the 30-year fixed mortgage was really coming into mature form, in part backed by more government maneuvering that helped make 30-year fixed mortgages a lucrative investment once it was securitized on Wall Street. Because before—and it’s almost a side point, so I won’t go that deeply into it—but there’s nothing inherently attractive about a boring old 30-year fixed. There was a lot of intentional involvement by the government to make this something that was a symbiotic public good and a really, really profitable investment for the financial-services world, which helped then spur more crowding in of housing investments.

And so, when you add up the numbers, a key reason why there are such large, soon-to-be inherited sums is how I framed it in the story, is that incredible way that boomers benefited from price growth in the financial and housing market. So, just to rattle off the two main stats that were associated with this passage, the average price of a U.S. house has risen by about 500% or so since the early to mid-’80s, when boomers were in their 20s and 30s. And that’s, as I just said, prime years for household formation. And we’ve all witnessed and have all benefited—we can get into the major downsides that might have come with this transformation as well—U.S. corporations becoming just these countries unto themselves, these global behemoths. And so, if you were invested early on, and there are plenty of middle-class, upper-middle-class, and certainly affluent boomers that were invested early on in the stock market, then you’ve experienced incredible returns. If you just buy and hold, park it, don’t think about it, which is a major investment strategy that many people do, quite smartly I’d add, then the stock market by the S&P 500 index is up by almost 3,000% since the beginning of the ‘80s, which again is around the time index funds took off as a mainstream investment for regular folks, not just corporate employees in the C-suite. So, it’s this weird mix of timing, the maturation of certain investment vehicles that combine to give boomers so much wealth.

The Wealthiest Boomers Wind Up on Top

Jeff Ptak: A key point of your piece is that most baby boomers will not be dying with vast sums of wealth. They may leave a few thousand dollars or their homes to their heirs. Instead, the wealth is quite concentrated with the wealthiest boomers. Can you expand on that?

Smith: So, high-net-worth and ultra-high-net-worth individuals, those with at least $5 million and $20 million in cash or easily cashable assets, make up only 1.5% of households. Together, high-net-worth and ultra-high-net-worth individuals constitute 42% of the volume of expected transfers through 2045. So, that’s $36 trillion of money. And it is highly, highly concentrated. The sort of tongue-in-cheek passage that I have in part of the story that addresses this is illustrating through Succession, the HBO show, that, yeah, that is what that sort of wealth looks like. And while absolutely there are more, I guess, you could say run-of-the-mill wealthy families, a third generation family of doctors or somebody that was involved in an IPO in the ‘90s and invested their money well and maybe got into investing a little bit of real estate around their Midwestern town or city, that’s absolutely there. And that’s also trillions and trillions of dollars of wealth. And much of it will get passed on, though healthcare expenses will eat up a good bit of it. And yet, it’s not a side story, but that wealth, that upper-middle-class and normally affluent wealth still is dwarfed by high-net-worth and really ultra-high-net-worth individuals. So, when people get into debates about wealth taxes and these sort of things, and I assume that might come up now, I think it’s equally important to note that there are some folks like Morris Pearl, who I profiled in the story, who was a Wall Street money manager for many years, got started at Salomon Brothers, he says he supports reforming the tax system to avoid jeopardizing social stability and economic growth. Freddie thinks that we’re in danger of becoming secularly stagnant again in a few years if this level of wealth and equality continues to go forward because of a lack of dynamism. Morris Pearl is also in the camp that we don’t necessarily need the money of the magnificently wealthy. I guess one way to talk about it, my pal Nathan Tankus made this joke that, you can’t cut up a yacht and eat it. Abundance for the middle class and working class isn’t necessarily this eye-for-an-eye trade-off, but it is true that as people have become magnificently wealthy, thanks to the booms, especially in tech, banking, and so on, that they’ve also been taxed less than they otherwise would have been with old tax rules. So, it’s this winners-take-all compounded by government policies and regulations for sure, and then just through the natural physics of how money works, compound interest is of great help to anybody that already has a very large pile of assets, which all of these people in the ultra-high-net-worth category do.

The Racial Wealth Gap

Benz: Right. I wonder if you can discuss the role of race in all of this, which you did discuss in your piece as well. In a graphic, you show how wealth in the U.S. is disproportionately concentrated in the hands of white families. Is that getting any better?

Smith: Slowly, but surely. I think going back to what I just said, just the very nature of compound interest means that there is no … And I know this is a very sensitive topic. I am a Black American myself, so I don’t mean to be dismissive. But if you just follow the money and understand the data and understand how money begets money, wealth begets wealth, then there is no catching up in terms of absolute terms between whites and Blacks in this country. And it’s not for me to decide what we ultimately do with public policy and how much we factor in racial wealth and equality to talks about wealth equality and income inequality. But I do think there was a very well-intentioned focus, over the last decade, on the racial wealth gap. And it was really remarkable in a way that I think shows a lot of societal progress. It was a very key part of the 2020 Democratic primary talking about this. And I think directionally that is all positive. But I think part of what I tried to do in this article was show that this country is still mostly white. Most people in this country are not wealthy. And yet, most white people are not necessarily wealthy, but most rich people are absolutely white. And so, there’s this weird sort of thing where, to go back to the ultra-high-net-worth individuals, that is a very homogeneous group. You can find literally a couple of Black billionaires in that group, maybe. Certainly, Asian families and Hispanic families and others that have done well, but it is very much not a diverse group. And a lot of that wealth—not all of it, but a lot of it, if you trace it back far enough—is absolutely directly connected to an apartheid society that we had for most of this country’s history. And yet, I think if we added, let’s say, like Jay-Z is a billionaire, if we created 100 more Jay-Zs with just as much wealth as Jay-Z and Beyoncé have, well, then in the data, the racial wealth gap would shrink substantially. It would still be huge.

I’m doing a little bit of a bit here, but it would shrink a lot. And I would just tell people that spend a lot of time focusing and talking about closing the racial wealth gap is that what you want to see. And I think they’d probably say, no, no, no, what we want is to have better opportunities and better outcomes for the Black community and other historically disadvantaged communities. And I think that leads you to a suite of solutions that, in a super corny way, could be framed as a rising tide lifts all boats. But if the goal is to make sure that there is a higher standard of living for the Black community, and for all communities of color, for people of all colors, then you might in a way that I think ends up helpful for this conversation have less pie-in-the-sky debates about reparations and things of that sort and maybe have a broader set of considerations and policy reforms that will help not just Black folks who are disproportionately in poverty, but everybody who’s in poverty or everybody who’s struggling to afford a home for the first time, and so on, and so on.

Social media is combative. The intelligentsia is a passive-aggressive but rough-and-tumble place. So, maybe that’s too hopeful of me. But I think one thing that this piece might have quietly done, though maybe I’m being biased because I’m just hoping that my own story has a desired effect, I think it hopefully helped push people into that latter set of concerns that I mentioned. Since once we get into race and things get very personal, then I think we often end up having unproductive conversations, even if it’s absolutely important to keep our eye on the ball of all the ways that racial inequality is still something that this country deals with in a very ugly sometimes way.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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