September 23, 2014

Left Behind in Wealth Accumulation, Younger Americans Face Difficult Financial Challenges

Most plans to put the federal budget on a more sustainable path make a crucial assumption: That today’s younger workers will pay more of their own retirement costs than previous generations have.

By setting aside more money for retirement, the thinking goes, these younger workers can enable the federal government to reduce the high projected growth of Social Security and Medicare. They should theoretically be able to do this because they have more time to save large amounts of money and to let those savings compound.

As The Concord Coalition has often noted, however, Washington already favors older generations in many ways. And younger Americans face a number of financial hurdles and future challenges that must be kept in mind.

Many of them have been hit hard by the last recession, struggling with a poor job market and – thanks to skyrocketing tuition costs -- large amounts of student debt. With companies cutting back on retirement and health care programs, many younger people who have jobs  do not receive the compensation or employee benefits that their parents did.

The large and growing federal debt, meanwhile, means that younger Americans can expect higher taxes and less assistance from the federal government throughout their working lives.

A recent study at the nonpartisan Urban Institute focuses some welcome attention on the uphill financial struggles facing Americans who are now in their 20s, 30s and early 40s.

“Despite the recent recession, our economy in 2010 was about twice as rich both in terms of average incomes and net worth as it was 27 years earlier in 1983,” says Eugene Steuerle, one of the study’s co-authors. “But not everyone shared equally in that growth.

“Younger generations have been particularly left behind. Roughly speaking, those under age 46 today, generally the Gen X and Gen Y cohorts, hadn't accumulated any more wealth by the time they reached their 30s and 40s than their parents did over a quarter-century ago. By way of contrast, baby boomers and other older generations, or those over age 46, shared in the rising economy—they approximately doubled their net worth.”

This chart from the study tells the story. Using 2010 dollars, it draws comparisons between people of the same ages in 1983 and 2010.

Older Generations Accumulate, Younger Generations Stagnate

Change in Average Net Worth by Age Group, 1983–2010

Steuerle, a senior fellow at the institute, notes in a commentary explaining the study that households usually add to their savings as they age, while economic growth causes income and wealth to rise. As a result, generations in the past accumulated more wealth than their parents had done at the same age.

“This normal pattern no longer holds for the younger among us,” Steuerle says.

Younger households were hit particularly hard by the last recession, in part because those who owned homes often had less equity relative to value in them.

“If a house value fell 20 percent,” he explains, “a younger owner with 20 percent equity would lose 100 percent in housing net worth, whereas an older owner with the mortgage paid off would witness a drop of only 20 percent.” In the financial markets, meanwhile, older generations “hold a much higher percentage of their portfolios in assets that have recovered or appreciated since the Great Recession.”

But the study also indicates that young people began to be left behind in terms of wealth accumulation even years before the last recession.

Steuerle’s list of likely suspects includes delayed entry of young people into the work force, a lower employment rate for them relative to older people, lower pay, and “higher shares of compensation taken out to pay for Social Security and health care, with less left over to save.”

He offers this cautionary note for government policymakers:

“Whatever the causes, we should . . . remember that public policy now places increased burdens on the young, whether in ever-higher interest payments on federal debts they will be left or the political exemption of older generations from paying for their underfunded retirement and health benefits. At the same time, state and local governments have given education lower priority in their budgets; pension plans for government workers now grant reduced and sometimes zero net benefits to new, younger hires; and homeownership subsidies post-recession increasingly favor the haves over the more risky have-nots.”

The Concord Coalition has long stressed the importance of inter-generational fairness. In thinking about fiscal reform, elected officials and the public should carefully consider how the necessary sacrifices of deficit reduction are distributed among Americans of different ages. Everyone should be expected to help put the nation on a more responsible path.