These 3 Demographic Factors Pretty Much Predetermine Your Financial Future by John Mauldin, Mauldin Economics

In this week’s Outside the Box (my free weekly newsletter), I’d like to share an interesting analysis of the growing wealth and income divide from Ray Boshara.

He is senior adviser and director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. The center conducts research on family balance sheets and how they matter for strengthening families and the economy.

The essay is fascinating yet sobering. I can kind of go along with some of the author’s ideas, but the Progressive cheerleader thing is a little disconcerting. That being said, the data squares with other work I have seen.

The wealth and income divide is not 1%-99% but more like 25-75. (There is a link to a book at the end for those who want a really deep dive.)

[drizzle]Anyway, I found the data in this essay very interesting, and I think you will, too.

Thrivers and Strugglers: A Growing Economic Divide

By Ray Boshara, Federal Reserve Bank of St. Louis

Originally published on

Bravo to MacKenzie. When she was born, she chose married, white, well-educated parents who live in an affluent, mostly white neighborhood with great public schools. She also chose her birth year wisely, making sure that she graduated from college and entered the job market when the economy was rebounding from the Great Recession. Thanks to the wealth and financial savvy of her parents, MacKenzie graduated from a private, four-year selective college debt-free, giving her many career options as well as the ability to start saving for a home and retirement.

Because of her great “choices,” MacKenzie is likely to accumulate wealth and achieve financial health over her lifetime. She and her parents belong to the roughly one in four American households we can call “thrivers.”

But too bad for Troy. Despite being just as bright as MacKenzie, he chose nonwhite parents who never married and live in a poor, highly segregated neighborhood with lousy public schools and few opportunities to be involved in music, sports and civic activities. Troy’s young, hard-working, conscientious mother was never able to start college. In order to manage the frequent ups and downs in her financial life, she has accumulated debts to family members and credit cards. She also lacks the know-how and networks to get Troy on a college-bound track, something his school fails to do as well. And Troy unwisely chose to finish high school just as the Great Recession was getting underway. So, finding any job, let alone a decent-paying one with benefits, eludes him.

Because of his bad “choices,” Troy is not likely to accumulate much wealth or feel financially healthy over his lifetime. He and his family belong to the roughly three in four American households we can call “strugglers.”

Research from the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis suggests that three demographic drivers – age/birth year, education and race/ethnicity – increasingly matter for building wealth and financial security. MacKenzie and her family’s efforts to build wealth are buoyed by these demographic tailwinds, while the lack of them creates headwinds that hamper Troy and his family’s efforts to succeed financially.

Let us consider each of these characteristics, or drivers, separately.

Financial Future – Race, Ethnicity and Wealth

Beginning with race or ethnicity, a few facts stand out.[1] First, the wealth gaps are disturbingly large and the rankings have persisted since 1989. White families rank first, followed by Asian families, Hispanic families and then black families. With the exception of Asians, the median net worth of all groups in 2013 was about the same as in 1989; the Great Recession wiped out most of the post-1989 gains. However, prior to the recession, whites and especially Asians had seen dramatic increases in their wealth. Since 2010, they have seen their wealth begin to grow again, while the wealth of blacks and Hispanics has continued to decline. (See Figure 1.)

Financial Future

Financial Future

Also, wealth disparities are starker than income disparities. Median wealth for Hispanics and blacks is about 90 percent lower than that of whites. In contrast, median income of Hispanics and blacks is only 40 percent lower. This suggests these two groups may have had few opportunities to “convert” their diminished incomes into wealth, such as through homeownership and retirement plans. And although one would expect age and education to help explain the persistent differences in wealth accumulation across racial and ethnic groups (whites are generally older and better educated than blacks and Hispanics), our research shows that the wealth gap is largely unchanged even among equally educated, similarly aged whites and nonwhites. Stated more starkly, education does not appear to be an equalizer, at least in terms of wealth. Therefore, other factors must be in play, including early childhood experiences, parental influences and, of course, deep and historical discrimination against blacks and other minorities.

Education and Wealth

Not surprisingly, the association between a family’s education and its wealth is very strong and has become stronger with time, leading to large gaps in wealth by level of education.[2] Only families with college degrees or higher have seen their wealth increase since 1989 (even though all groups saw their wealth decline in the Great Recession). Those lacking a high school diploma saw their wealth plummet 44 percent between 1989 and 2013, while families with a high school diploma saw their wealth decline 36 percent. Meanwhile, families with a two- or four-year college degree experienced a 3 percent increase since 1989, while the wealth of those with advanced degrees spiked 45 percent.

Notably, however, the correlation between education and various measures of economic and financial success does not represent causation. That is, the college degree itself may only partially explain differences in wealth. The degree serves as a marker of many other factors also correlated with educational attainment, such as native ability, family background, marriage patterns (i.e., the tendency of college graduates to marry other college graduates), being read to as a child and the likelihood of receiving gifts or inheritances.

Age and Wealth

Finally, let’s look at age or, more precisely, year of birth. Of course, older families are expected to have more wealth than younger families. But what we are observing is something deeper, even historical.[3] To our surprise, age is the strongest predictor of balance sheet health, even after accounting for race and education. Americans in their 20s and 30s lost the most wealth in the recession and have been the slowest to recover. The wealth of younger adults is concentrated in homeownership, which suffered greatly during the recession.

Younger adults also have significant mortgage and consumer debts, and few liquid assets. In addition, they faced severe labor market challenges during and following the recession. But this is not just a recession story; it’s a generational, more troubling story: An American born in 1970 is projected to have 40 percent less wealth over their lifetime than an American born in 1940. Clearly, some larger economic and social forces are underway, reshaping economic opportunity in the U.S.

Policy Implications

In a world where uncontrollable factors – birth year, race/ethnicity, parents – and education – a choice, but

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