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Vol. 38, No. 18 |
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5-21-2008 Ask the Expert, 5/22/08
There is a general consensus that the Boomers’ retirement will have only a small negative effect, if any, on rates of return on assets. The increase in life expectancy means more resources are needed to support longer retired years. Together with fast-rising health care costs, most retirees are more likely to hold on to their assets for later life consumption. In general, spending-down of wealth has been smooth for the previous generations, and many retirees keep accumulating wealth during retirement. Experts talk about how the Boomers will be a burden on the entitlement system (Social Security, Medicare) as they age. But what will the wealth they leave behind mean for Generation X? Wealth transfers can occur in many forms, as an investment of higher education for children and grandchildren, financial gifts during lifetime, and inheritance after death. The Boomer parents have made considerable investment in higher education during the era of the rising costs of higher education, and many helped their children’s purchase of a first car and first house. Now, the question is how much wealth they will leave behind; considering the shift from defined-benefit to defined-contribution pension plans, an increase in wealth transfers is anticipated, as retirees receive more of their pension benefits as lump-sum amounts rather than as annuity payments. The estimated value of intergenerational wealth transfers is large. How much do intergenerational transfers contribute to wealth accumulation of the nation? The role that intergenerational wealth transfers play in wealth accumulation has been a controversial issue. Intergenerational transfers are estimated to account for about 80 percent of wealth accumulation based on a broad definition that includes college tuition and interest on those transfers. Without counting for college tuition and interests on inheritance, intergenerational transfers are estimated to account for no more than 20 percent of wealth.
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The first Baby Boomers are due to become eligible for Social Security this year, and concerns have been raised about the possibility that Boomers will sell off large amounts of financial assets in retirement. With relatively fewer younger workers available to purchase those assets, would that kind of sell-off create a market “meltdown” — a sharp, sudden decline in asset prices?