Preparing for the $T Intergenerational Wealth Transfer
By Perry Kinkaide, MSc, PhD, CMC
Winning a lottery can have tragic results. Millennials and charities are just beginning to realize they are about to win a lottery, possibly the most impactful economic event of the 21st century. It will be the largest, broadest, deepest intergenerational transfer of wealth in history: transferring $trillions of wealth accumulated by baby boomers as they retire and expire. I’ve been considering and alerting others to the threats and opportunities for financial planners and high wealth people, government and early stage entrepreneurs.
Some millennials are already anticipating and pre-spending their inheritance. Hence, the boom in growth underway of financial planners, new investment services, and government’s interest in how to access private capital. What has not been discussed in any depth is the impact of the wealth transfer on public services.
Are Public Services Vulnerable?
The impact will be profound and should be stirring a public policy discussion now alerting those expecting more or less from governments. Since the end of WWII we’ve seen an extraordinary growth of government at all levels. We’ve also seen public debt grow worldwide in the $trillions. The run-up of budgets and services without regard to debt has contributed to an increased sense of entitlement for “public” services financed by increasing taxes targeting wealthy and corporations or debt financing.
Elected officials with access to “free money” have transitioned government and public to expect “public” service for “free”. Governments have been getting elected on special interest giveaways, pandering to huge public sector unions, and blaming billionaires and corporate job creators if the public coffers are empty. The growth of public debt has been unrestrained. But why worry, the economy has been growing. Debt is under control as a portion of growing GDP and interest rates for serving debt are low. But…
Baby Boomers Drive The Reckoning
A reckoning is underway and unavoidable triggered NOT by a crisis but by the huge multi-$T wealth transfer by retiring and expiring baby boomers. The pending $T transfer event should hardly be a surprise given the extraordinary economic boom and accumulation of wealth by middle class baby boomers since their post WWII birth. While the event can hardly be considered surprising, features of the event underway are SHOCKING and contributing to the reckoning.
- $T are to be transferred. Recent estimates are that $68T – yes trillion US, will be transferred to millennials as baby boomers retire and expire. This equates to more than $5T for Canada. A once in a career opportunity for financial planners. Some have speculated that the familiarity of millennials with technology may be good news for contemporary bitcoin solutions and cryptocurrencies.
- The $T tsunami will hit quickly. Ageing of the population is not smooth. Birthrates climbed rapidly after WWII creating a spike in their proportion of the population. The spike gives the financial industry little time to prepare increasing usage of automated, self-help, on-line investing but investment opportunities may not keep up inflating the cost if good but all too rare opportunities. Fraud may also be an increasing issue as regulators have difficulty keeping up and addressing creative investment options.
- Baby boomers were the source of public service demand that continues to rise; but their offspring may be in for a shock as the capacity to sustain the financing of public services is expected to drop sharply as taxpaying baby boomers retire and expire.
The size and aging of the baby boomer market has commanded sustained public interest. Public social services of health and education now dominate government expenditures and constitute significant sources of employment.
Current standards cannot be sustained when baby boomers retire and expire: a) removing them as employees from the workforce, b) reducing demand for professionalized client services particularly healthcare, and c) reducing the number of taxpayers for financing public services.
- Baby boomers have fueled North America’s consumer economy. Markets MUST adapt quickly. Technology is more familiar and acceptable to millennials as the recipient of the wealth transfer. Institutional distrust and data accessibility are enabling the personalization of services and products in virtually every service sector.
- Accumulation of public debt is crushing. Low interest rates have continued to fuel growth of public and private sector debt. ANY increase in interest rates and/or a sustained decline in tax revenues would shock public services.
I’ll pull no punches here and tell it as it is. The debate must begin in anticipation of the looming tsunami. The good news is that the private sector is investing in technologies to accommodate and benefit from the transition and release of accumulated wealth. The bad news is that the public sector wants to sustain the status quo as it is dominated by public sector professionals beholden to the profession with few schooled in transition management. Most claiming management status are really administrators – sustaining the profession.
What is needed to prepare?
- Millennials need financial planning and their offspring need financial literacy. Without a plan, most will take their inheritance as an opportunity to spend, save or invest, driving a short term consumption boom and consequent hangover.
- Banks must be prepared to accommodate the rise in usage of on-line investing, usage of cryptocurrencies, and other innovations in fintech.
- Knowledge and technology seek a vacuum. Data is fueling the adoption of machine learning and artificial intelligence throughout the economy, necessary to accommodate a shrinking workforce. The investment in data extraction and predictive analytics is already in the $Ts, creating entirely new unregulated industries. Regulating data – another vacuum, in the interest of protecting “privacy” will be tricky as it confronts another deeply held value – the “freedom of speech”.
- Governments must rationalize social service standards and/or facilitate their personalization. Innovations in medicine and healthcare and the associated deinstitutionalization must be priorities.
- As for education, it too must move beyond government as rapid increases in knowledge make lifelong learning necessary. Deinstitutionalization and innovation become essential for supporting service personalization.
- Professions must prepare for an elevation in the importance of relational skills and lifelong learning to complement their role as aides to consumer designed technologies. A longterm issue that should not be ignored, is the aftereffect. Overbuilding of public services for baby boomers may leave an excess of seniors services and facilities. When such events have occurred in the past, the facilities became institutions for “undesirables”.
- Governments must prepare for the crisis as an opportunity to give the “client” the status of a “consumer”, that is, personalizing public services: a) monitoring service satisfaction, b) incentivizing innovation contributing to service personalization, c) training and recruiting managers as change agents while, d) maintaining public service insurance for the truly disadvantaged. Consumers expect choice and represent a new force – resisted by baby boomers, pulling services out of the public domain.
- Collaboration will be needed among all stakeholders to expedite the transition for incentivizing baby boomers and the public at large in the investment of private capital in innovations contributing to the personalization of service and increased industry productivity. Collaboration will serve to heal the fragmented, highly inefficient and overly expensive public services.
- Recognition that the humanities MUST guide any technology driven transition thus calling for arts and science, humanities and technology, to work together.
If you have gotten this far, and are breathless, angry, or in denial…then consider the alternative.
Caution Is Warranted
Governments may be wary of the threat that recipients of the wealth transfer will be free spending, market driven, and step in and mitigate anticipated excesses.
Mitigation may come by increasing consumption taxes and/or reducing the impact of the “free money” wealth transfer by reducing the buying power of millennials. This could be done by introducing a wealth transfer tax arguing that the new tax be dedicated to paying down the public debt accumulated while serving the former baby boomer generation. The downside of such intervention is that such measures will impede a critical improvement in productivity and the competitiveness of the affected economies.
Some governments may even declare innovation as a priority so as to preserve public services. Governments are already recognizing that technologies – such as AI, have the potential to dislocate expensive knowledge workers and address:
a) an increasing demand for service and it’s personalization,
b) increased entrepreneurship and global enterprise, and
c) a decline in the supply of social service resources.
The policy of increased “innovation” typically fails in public services unless introduced with adequate resolve to confront institutionalized professional resistance and the drive/ culture to maintain the status quo.
Regardless – as no one knows the future, it is about time for Vision & Leadership, Creativity & Convergence. It’s exciting to know that “free money” in the hands of the baby boomer’s offspring may be the very event to trigger an end to the 20th century’s assembly of “public” service supply and transition an increase in the “personal” service market.