Aleksandar Nakic/iStock

Making It Up to Millennials


tim ferguson, the former editor of Forbes’s Asia edition, writes about business and economics.

Published December 1, 2020


The financial plight of America’s millennial generation (those born between about 1981 and 1996) is the topic du jour of an expanding hardcover book rack, not to mention a gazillion bytes of blog posts. Yet, within the personal finance establishment, a different spin of money-to-the-rescue holds. The number “$68 trillion of wealth,” due to be passed along to this same generation, is frequently heard, sometimes from excited Internet tribunes drawing on seemingly authoritative reports.

So who’s right? Are the millennials about to be rich or are they doomed to live in their parents’ rec rooms for decades down the road? To which I answer, “Yes.”

Assets are indeed building up among the generations now aging out. By one widely reported guesstimate, the aforementioned $68 trillion (after inflation) will be available for transfer within a couple of decades. Barring collapses of the equity and housing markets or much higher taxes or a tsunami of charitable generosity, nearly $60 trillion is expected to go to heirs. This should help shore up millennials’ households — provided, that is, they can afford to wait.

Delay is a sad fact for millennials living with crushing student debt and stagnant wages, who lacked savings for down payments on starter houses even before Covid-19 sunk its claws in. The vicissitudes of the business cycle have denied them the relatively easy ways up the economic ladder enjoyed by their elders. Meanwhile, government policy has fostered and sustained a real-estate boom that’s put home ownership out of reach for millions of millennials. And changes in the tax code have made the pudding even lumpier.

What about the generational transfers scheduled down the line? Couldn’t they be speeded up?

To be clear, we’re talking about gifts, not homicide: Uncle Sam does encourage giving early and often. Parents and grandparents can hand over $15,000 each year to any number of beneficiaries without creating tax liability for donors or recipients. Moreover, there are no limits on tax-free gifts for tuition (or for doctor’s bills). And for an especially big boost — say, a down payment on a house — there’s another tax escape.

What’s known as the “unified credit” in the tax code permits gifts exceeding the yearly tax-free limit to apply toward the estate tax exemption at death. Bestow an extra $100,000 now, no problem (as long as you have it to give!). The $100K gets subtracted from the exemption included in the federal estate tax. As recently as 2010, this was arguably a boon for broad swaths of the upper-middle class — just $1 million was free of federal estate tax at death. But since then, the exemption has swollen to $11.6 million for single filers (and double that for joint filers). If you’re one of only a few children, that’s plenty for a big head start in adult life. No roommates or 12-year-old Corollas for you!

So, for those who have, there’s little reason to hold back. Or so you might think. Although exclusions from the gift tax do figure in donors’ thinking, it turns out other factors largely explain considerable resistance to giving money to heirs when they really need it. Cerulli Associates, a wealth management group in Boston, says that 39 percent of high-net-worth households doubted their heirs were ready to handle the dough well. An overwhelming 61 percent said they weren’t comfortable disclosing the extent of the family fortune to their offspring. Perhaps they fear a little generosity would invite expectations of more.

Not only is the money in the hands of baby boomers and Gen Xers who may run down the cash by living an inconveniently long time, almost half of it is concentrated in the richest 1 percent, whose kids rarely need the money.

If that mindset wasn’t enough to slow the flow to a trickle, baby boomers have been cautioned by the likes of Fidelity Investments that an average couple retiring at age 65 can expect $295,000 in medical expenditures beyond Medicare coverage and before any long-term care costs. Only the truly rich can look past that to the care and feeding of their healthy adult kids.

Which brings us to the biggest obstacle to an equitable transfer of wealth to the millennials: not only is the money in the hands of baby boomers and Gen Xers who may run down the cash by living an inconveniently long time, almost half of it is concentrated in the richest 1 percent, whose kids rarely need the money.

Doing the math (which I won’t bother to spell out here), this means that the ballyhooed $68 trillion bundle is down to maybe $38 trillion for the 99 percent poorest of millennial heirs. Plus, Cerulli figures that charity will take out another 12 percent — but let’s just say 8 percent for the vast majority of families with not enough to be called rich. That brings the intergenerational transfer down to $35 trillion.

Divided by 70 million millennials, this comes to about a half-million dollars per individual, if and when the older folks let go of the purse strings. And arguably, we could do more to encourage their generous impulses. But that’s easier said than done.

Some relevant parts of the Tax Cuts and Jobs Act of 2017 (the Trump initiative) expire in 2025. Letting the expanded uniform tax credit lapse would return this estate tax exemption to less than $6 million.

A harder political feat to pull off would be to eliminate a feature of the tax code that most people can’t believe is real the first time they hear it: the “step up” of capital gains basis at death. This esoteric corner of the tax code permits heirs to revalue bequests at their current market basis, effectively wiping out any unrealized capital gains tax liability the assets carried before the asset owner’s death. The tax basis of the parents’ manse, bought for $2 million in 2010, is thereby magically reset at market value — say, $5 million — for its next owner. Take that tax break away, and high-net-worth millennial inheritors would owe bigly when they sell the place, even if the estate is covered by the estate tax exemption.

That still begs the question of whether it would be both practical and desirable to transfer wealth in amounts that would significantly improve intergenerational equity. Two possible approaches that have gained political traction among millennials (and Gen Z folks just behind them) are free college tuition for all and greater federal down-payment assistance.

These could, indeed, reduce the tilt of the proverbial playing field — but at the cost of distorting market incentives. Do we want to double down on our sometime commitment to universal home ownership, creating an ever broader constituency for carnival-barker mortgage brokers and the crazy mortgage interest deduction? Do we want to steer tens of millions more young people to years of higher education that may do little to increase their future incomes or productivity?

Other ways to supplement the living standards of the have-not generations, such as universal medical coverage and subsidized childcare support, seem less problematic in terms of cost-effectiveness and economic efficiency. But they carry the potential of creating extraordinary cost pressures if suddenly enhanced demand meets insufficient supply. I fear we need to ease into such commitments if we are to commit to them at all.

Now it’s my moment to reveal my inner Mr. Micawber: Might the surest thing we could do for millennials (and generations that follow) be a commitment to reducing the gaping budget deficits for which they are on the hook? This is the one (rhetorical) concession that conservatives seem to be willing to make for the betterment of future generations. But making this work would hardly be easy.

For one thing, squeezing the deficit means raising somebody’s taxes and/or cutting spending that some of us value. And frankly, it’s hard to imagine the political process by which either seniors or the rich (who between them have most of the private assets) would willingly sacrifice to this end. So cutting deficits would probably come at the expense of the generations already getting the short end of the stick. For another, it’s far from clear that deficit reduction should be anybody’s priority in a society that will need to spend trillions if we are to escape the worst of climate change, another sore spot for the Greta generation.

Yes, the $68 trillion is probably a decent estimate of the wealth that could, in theory, be transferred to generations left holding the short straw. But theory, alas, won’t get you far. No wonder millennials are angry.

main topic: Demographics
related topics: Tax Policy