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Old Money Caught in the Great Redistribution

How the recession transfers wealth from the old to the young.

Older Americans are bearing the brunt of the economic downturn, the most severe since the Great Depression, economists say. Between mid-2007 and early 2009, when stocks and real estate values collapsed to their lowest point, U.S. households aged 60-69 experienced a decline in net worth of $312,000, on average, compared to an average decline of $177,000 for households overall. That's according to "Intergenerational Redistribution in the Great Recession," a study for the National Bureau of Economic Research.

In a deep recession, households approaching the end of their life cycle (there's a good reason economics is called the "dismal science") cannot wait for prices to recover and must sell homes and stocks at depressed prices to maintain their standard of living, the study shows. In the first quarter of 2009, the value of stocks and homes dropped as low as 47 percent and 29 percent, respectively, below mid-2007 values.

Based on data from the Survey of Consumer Finances, the study by economists at the University of Minnesota, University of Pennsylvania and Federal Reserve Bank of Minneapolis finds that incomes of younger generations fall off sharply in a severe recession, but prices of stocks and homes decline more than twice as much as wages. It shows that if the young are able to enter the market after the shock hits, they can buy homes and stocks at fire-sale prices, offsetting the drop in earnings they are experiencing.


Stock prices tend to rise during a recovery period: By the end of 2010, for example, they were only 22 percent below their mid-2007 peak. "As the economy recovers (with high probability) in subsequent periods, stock prices bounce back, and younger generations enjoy substantial capital gains," the study states. Over time, their overall share of wealth will increase, though not necessarily so much that they overtake the older generations as the wealthiest sectors.

Older households "suffer large welfare losses from a severe, long-lasting recession," the authors conclude, while "young households, in contrast, lose less and might even benefit from an economic downturn."

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