Wealth transfers confound the experts

November 27, 2005|By JAY HANCOCK

Formerly pessimistic experts are already bumping up estimates for holiday spending. The usual explanations are dragged out.

Consumers are blowing the proceeds of loans secured by greatly appreciated McMansions and townhouses goes one answer. Lower energy prices freed up cash for the malls. Americans are just naturally profligate; go figure!

But there is another, powerful force affecting what's going on, and it almost never gets discussed as a consumer-spending factor. The continuing wealth transfer from Depression-era savers to their baby boomer children may be supplying "dark energy" to the economy, an X-factor that helps explain short-term and long-term consumer resilience.

Today's oldsters are the wealthiest retirees who ever lived. Early troubles trained them as savers, and the fabulous U.S. growth of the past six decades turned their reserves to riches.

Now they are passing from the scene, or preparing to. The result is a tide of inheritances and asset gifts that almost certainly helps explain why people who predict a consumer meltdown keep getting it wrong, year after year after year.

Consumer spending continues to rise, and the economy continues to avoid bad trouble, partly because the Depression generation is passing its nest egg to the possession generation.

This transaction is no secret. Every few years scholars publish an eye-popping estimate of generational wealth transfer. In 1993, two Cornell University economists figured the tally would be $10.4 trillion over 50 years.

In 1999, Boston College's Paul Schervish and a colleague figured it would be $41 trillion forked over from 1998 to 2052. In late 2002 - at the bottom of the stock slump - the two re-examined the research, confirmed it and believe that if anything it's "a low estimate," Schervish said in an interview. It could be as high as $136 trillion.

Whatever the measure, this is real money with potentially huge economic effects. The whole U.S. economy is a mere $12 trillion. The consumer spending component is $8 trillion.

The "cash-out" mortgage refinancings mentioned by forecasters to explain shopper buoyancy will put an extra $204 billion in consumers' pockets this year, Freddie Mac estimates. Annual generational-wealth transfer is probably at least in the same ballpark. A few years ago, a Wall Street strategist figured it was $350 billion annually.

Yet inheritances are rarely seen as consumer-spending engines.

Why not? Nobody can measure them. The monthly income, saving and spending statistics that the government publishes are silent on generational wealth transfer. Most bequests aren't big enough to be taxed, so IRS information is unreliable. The Federal Reserve takes a stab, but only every three years and with old data; its 2004 Survey of Consumer Finances still isn't out.

And even people such as Schervish have thrown up their hands at trying to estimate how much money gets handed off year-by-year.

"A lot of people ask us for that," he says. "There are too many variables to capture."

(You can't just divide $41 trillion by 55 years and get $745 billion a year, he says. Recessions come and go, affecting values. More people die some years than others, and much of the $41 trillion will be delivered near the end of the period, built up by compound interest.)

But because something isn't measured doesn't mean it doesn't exist.

About 2.5 million Americans died last year. Many passed assets to heirs. Bequests favored the wealthy, but numerous families got $10,000 or $50,000 windfalls. And both rich and middle-class recipients, raised on Jack Nicholson rather than Jack Benny, were probably more likely than their parents to spend the boodle.

Many oldsters aren't waiting to die to pass on assets, either. They're giving money to heirs to qualify for Medicaid nursing-home coverage. Or they're doing it to avoid estate taxes - behavior that might be increasing as Washington's campaign to abolish estate taxes shows signs of losing steam. These pre-death handoffs are in addition to the $41 trillion that Schervish conservatively figures will change hands as bequests.

All these exchanges help explain why American households hold more assets to support debt and spending than economists give them credit for. (Other ways that household savings are underestimated in the official accounts include the failure to include capital gains and pension payouts as income.)

This year marks the 14th-consecutive annual increase in consumer spending, an unmatched record.

Consumers spent their happy little hearts out through a recession in 2001, which rarely occurs. They're going to make a decent Christmas for merchants this year.

The unmeasured bounty bestowed on them by parents and grandparents is a big reason why.


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