Good Tidings for a New Year:
The $41 Trillion Transfer of Wealth Is Still Valid

  The Largest Intergenerational Wealth Transfer in History January 2003   

Why the $41 Trillion Transfer is Still Valid

A REVIEW OF THE $41 TRILLION WEALTH TRANSFER

WHAT ABOUT THE ECONOMY?

HOW DID DROP IN STOCK VALUES AFFECT INDIVIDUAL WEALTH?

"WE'RE SPENDING OUR CHILDREN'S INHERITANCE"--BUMPER STICKER

LONGER LIFE EXPECTANCY, LESS WEALTH?

WILL MORE ANNUITIES REDUCE THE TRANSFER?

CHALLENGES 6-9 & ADDITIONAL QUESTIONS AND COMMENTS



A REVIEW OF THE $41 TRILLION WEALTH TRANSFER

The complete report will be published in January 2003 by the "Journal of Gift Planning" and can also be downloaded for free at our website.

The report deals with the following themes:

implications of recent economic trends for wealth transfer;

whether the value of personally held wealth has been significantly changed since 1999;

what increased longevity, annuitization of assets, and increased consumption among the elderly mean for wealth transfer;

what role the baby boomers play in wealth transfer;

how the wealth transfer will be divided;

and how trends toward lifetime giving may interact with bequests to charity.

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COMPLETE REPORT
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SUMMARY
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SUMMARY
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   Dear Colleagues:

The markets may be down, but the largest intergenerational wealth transfer in history is still coming to town. We released our report "Millionaires and the Millennium" in October 1999, documenting an intergenerational wealth tranfer of at least $41 trillion over the next five decades, of which at least $6 trillion would go to charity. Three years and much market turbulence later, we are confident in saying that the $41 trillion figure is still a reasonable lower estimate and does not need to be revised downwards. View the press release

Our new report, "Why the $41 Trillion Wealth Transfer Estimate: A Review of Challenges and Questions," responds to many of the questions and challenges we have fielded over the past two years. Our principle conclusion remains that it is not whether $41 trillion will be transferred, but how much more than $41 trillion will be transferred.

Since it was your thoughtful and thought-provoking questions and comments which sparked this review, we would love to hear from you. Some of the main points are summarized below and the complete report can be downloaded from our website.

We wish you all a peaceful and happy new year.
Paul Schervish, Director, SWRI
John Havens, Senior Research Associate, SWRI
Mary O'Herlihy, Director of Publications, SWRI

  • WHAT ABOUT THE ECONOMY?
  •    Challenge 1: The wealth transfer estimate is based on the robust growing economy during the latter half of the 1990s and fails to account for current and/or future recessions and downturns in equity, real estate, or other markets.

    Comments: The $41 trillion wealth transfer estimate assumes only a 2% secular real rate of growth in the $32 trillion of personally held wealth in 1998 rather than the high rates of growth in personally held wealth attained in the late 1990s. Even if recessions are more common than expansions during the 55 years spanned by the simulation, the $41 trillion estimate, which assumes only a 2% secular trend in the growth of personally held wealth, is based on growth rates below historic secular trends.

    Read section of the report on the economy

    Download complete report

  • HOW DID DROP IN STOCK VALUES AFFECT INDIVIDUAL WEALTH?
  •    Challenge 2: The wealth transfer estimate is based on an unusually high level of personally owned wealth when stocks and bonds were near historic peaks; the estimate would be significantly lower were it based on the current level of personally owned wealth.

    Comments: Like the secular growth rates, the $32 trillion baseline estimate of personally owned wealth used in the original report is a conservative, low estimate. It compares with the estimates released in 2001 by Federal Reserve Flow of Funds Accounts implying that total household wealth amounted to at least $32 trillion in 1998. Although household wealth surpassed $32 trillion after 1998, reaching a peak of about $36 trillion in 1999, it returned in the second quarter of 2002 to its 1998 level of $32 trillion (1998 dollars). Therefore, were the wealth transfer estimates based on the current level of household wealth instead of the 1998 value, they would remain unchanged. Specifically, the low-growth scenario would still produce an estimate of $41 trillion.

    Read the section of the report on the value of individual wealth

    Download complete report

  • "WE'RE SPENDING OUR CHILDREN'S INHERITANCE"--BUMPER STICKER
  •    Challenge 3: The majority of Americans start to spend down their assets when they reach retirement and the wealth transfer estimates do not take into account this expenditure pattern.

    Comments: Most American families do begin to spend down their assets when they reach retirement and most non-wealthy families continue to spend down their assets thereafter. However, for most wealthy families, a brief period of spending down their assets at retirement age is followed by a growth of assets in their later years that exceeds their dissaving (drawing down of assets). The low-growth scenario assumes that both wealthy and non-wealthy Americans consume their assets during retirement faster than in reality, thus allowing for retired American parents to spend an even larger amount of "their children's inheritance" without reducing the $41 trillion estimate.

    Read section of the report on dissaving

    Download complete report

  • LONGER LIFE EXPECTANCY, LESS WEALTH?
  •    Challenge 4: Americans have been living longer and are projected to live even longer in the future. The average American family will be spending their assets for a longer period of time, leaving smaller amounts of wealth to be transferred than is estimated by the simulation.

    Comments: Not counting the effect of greater labor force participation among older workers, the net effect of an additional year of life for all Americans would be to decrease the $41 trillion estimate, but to decrease it by less than $0.3 trillion. For all retirees regardless of wealth, the final estates of those that remain in the labor force will have a larger value than the estates of those who do not work during retirement years. Thus, when coupled with increased labor force participation among older workers, an additional year of life for all Americans could actually increase the $41 trillion estimate by a small amount.

    Read the section of the report on longevity

    Download complete report

  • WILL MORE ANNUITIES REDUCE THE TRANSFER?
  •    Challenge 5: If the trend toward increased annuitization continues, the amount of wealth to be transferred will decline because in order to purchase an annuity, individuals need to draw down their assets and because an annuity ceases to exist when the recipient dies, and so contributes no value to the estate of the recipient/decedent.

    Comments: If the $41 trillion estimate does not take into account the reduction in wealth due to increased amounts of annuities, it will over-estimate the coming wealth transfer. We conclude that on balance the $41 trillion estimate is not compromised by the current level and trends in annuitization, or by the way the current simulation model takes them into account. If anything, the growth in defined-contribution pensions, the tendency to receive distributions from defined-contribution plans as assets, and the tendency to spend from such assets at a lower rate than had the pension been received as annuity income, combine to make it likely that more than $41 trillion will be transferred.

    Read the section of the report on annuitization

    Download complete report

  • CHALLENGES 6-9 & ADDITIONAL QUESTIONS AND COMMENTS
  •    The review also looks at the share of wealth transfer going to the baby booomers; how the wealth transfer will be concentrated; how it will be distributed; and why it is so much larger than the the previous estimate of $10.4 trillion.

    In addition, we consider the effect that a shift toward more lifetime giving would have on the transfer from estates.

    Read remaining sections of the report:


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