Are the kids alright?
Saving and wealth accumulation among the millennial generation
Editor's Note:
The Millennial generation – those born between 1981 and 1996 and
thus between ages 23 and 38 this year – is the largest living generation in the
United States, recently overtaking the Baby Boomers. Millennials, who are about
a quarter of the population, have been a constant source of controversy, with
alternative narratives characterizing them as everything from noncontributory
to revolutionary.
New evidence, however, on millennials and wealth accumulation
tells a decidedly mixed and more nuanced story than any of the extreme
characterizations. In a new paper, written as part of the Peter G.
Peterson Foundation’s 2050
Project, Jason Fichtner, Hilary Gelfond and I examine the past and
prospective wealth accumulation of millennials.
The Arjay and Frances Fearing Miller Chair
in Federal Economic Policy
THE
STORY SO FAR
To date, Millennials have accumulated less wealth than most
prior generations at the same point in life. Figure 1 shows tabulations of
Federal Reserve Board wealth data from the triennial Survey of Consumer Finances (SCF), spanning the
period 1989 through 2016. In the latter year, Millennials were between the ages
of 20 and 35. We examine net worth accumulation among 20-35-year-olds in each
of the previous SCF years (with all wealth data reported in inflation-adjusted
2016 dollars). Because wealth accumulation patterns may not be particularly
informative for people who are still in college, we also examine wealth
patterns among 25-35-year-olds in each year.
The figure shows that, using either age-group comparison, median
wealth among Millennials in 2016 was lower than among similarly-aged cohorts in
any year from 1989 to 2007. The Great Recession in 2007-9 significantly reduced
household wealth, which has only slowly recovered since then. Median wealth
among Millennials was about 25 percent lower in 2016 compared to similarly-aged
households in 2007, and the percentage declines in mean wealth are even larger.
The factors driving net worth for Millennials are also different than previous
cohorts. For example, Millennials generally have higher student debt than prior
generations but less consumer debt.
HEADWINDS
AND TAILWINDS FOR RETIREMENT SAVING
The Millennials have certain advantages over previous
generations in terms of retirement saving; for instance, they are the most
educated generation in history. Furthermore, because of the evolution of the
pension system toward defined contribution (DC) plans, they may well work longer
than any previous generation, giving them additional years to save.
However, Millennials also face numerous disadvantages. Their
careers have gotten off to a rocky start because of the financial crisis and
Great Recession. They will be employed in contingent
workforce jobs (which have weaker retirement benefits than traditional jobs)
to a greater extent than previous generations. They are
marrying, buying homes, and having children later. Because of the shift to DC
plans, Millennials will be required to manage and navigate their own retirement
plans to a larger degree than previous generations, while also likely having
longer lifespans. They will face increased burdens from any eventual resolution of
the government’s long-term fiscal shortfalls in general, and the financial
imbalances in Social Security and Medicare in particular. They
face an economic future with projections of lower rates of return and economic
growth than in the past. All these factors make accumulating sufficient funds
for retirement more difficult for Millennials relative to previous generations.
DIVERSITY
The millennial generation contains a significantly higher
percentage of minorities than previous generations. About 44 percent of
Millennials identify as a minority (a race or ethnicity other than non-Hispanic
white), compared to 25 percent of individuals aged 21 to 36 in 1985. The United
States will be a “majority-minority” country by 2050.
A very broad literature finds that minority households have
tended to accumulate less wealth than whites in the past, even after
controlling for age, income, education, and marital status. Using cross-section
and pooled regressions from the 1989-2016 Surveys of Consumer Finances, we
confirm that result and show that minority status is negatively associated with
net worth, controlling for other household characteristics. We also show that
the difference appears to be growing over time for black households relative to
whites (Figure 2). Whether these trends persist is critical to understanding
how the Millennials will fare in retirement.
These results have implications for Millennials. The set of
economic and social conditions that racial and ethnic minorities experience in
the future will likely be different from those experienced by previous
generations – including family and marital status, education, neighborhoods,
discrimination, and job markets. Such differences could serve either to raise
or reduce wealth gaps between whites and minorities in the future. That said,
minorities in recent years faced different economic and social conditions than
did minorities in the past, yet wealth differences between whites and
minorities, controlling for observable characteristics, have risen, not fallen,
over time. If this trend continues, wealth inequality will continue to grow,
which will make it that much harder for minorities to save adequately for
retirement.
It is too soon to determine how well the Millennials will do in
retirement. Their peak saving years are still ahead of them, and many factors
will change over the next decade. Nevertheless, there are some clear
warning signs suggesting that Millennials should make retirement saving a
higher priority.
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