Americans Are Living Longer and Prospering

Longer life spans are an underappreciated cause of the increase in wealth concentration

By Richard B. McKenzie. Excerpts:

"But one major cause of this wealth concentration is going largely unnoticed: Americans’ increasing life spans have disproportionately increased the elderly’s considerable wealth advantage. They’ve had more time to save and invest because of advances in medical science during their lifetimes.

From 1940 to 2019, Americans’ life expectancy rose by almost 16 years, while the share of the U.S. population 65 and older grew from 9.8% to 16.7%. The elderly have progressively more healthy years to work. Most important, increased life spans have meant that older Americans’ wealth portfolios have been able to compound for longer.

To illustrate, consider a 65-year-old today who has a portfolio of $1 million, fully invested in an S&P index fund, enabling him to hold off for years shifting assets into lower yielding bonds. Suppose he chooses to work an additional 10 years, expecting almost the same number of retirement years as a 65-year-old had in 1940, but all the while allowing the $1 million portfolio to compound for 10 years. If the S&P increases at its historical inflation-adjusted rate of 7.2%, his real wealth will grow to about $2 million—without any additional investments. The retiree will move from the top 12% of wealth holders to the top 6%. The person with $6 million at 65 will move from the top 3% to the top 1% at 75.

If 67-year-old Bill Gates invests his wealth, slightly more than $117 billion this year, for the next 10 years and at the same low rate, he will add another $117 billion to the top 1% of aggregate wealth. That calculation reveals a truism: The greater the wealth at 65, the greater the portion of the wealth increase that will add to wealth concentration in the top tiers.

The upward wealth-concentration trend can’t be fully explained by increased life spans. Many people are able to increase their wealth dramatically without the benefit of age—and many elderly people can do the same without reaching the top tiers. But critics shouldn’t overlook that Americans 70 and up, who represent 16% of the population, now hold $35 trillion in wealth, or 27% of total wealth, up from a fifth three decades ago.

Fortunately, many young people, who can begin building their own portfolios, will be beneficiaries of considerable inheritance and longer life expectancies than today. They’ll just have to wait."