This report and its accompanying graphics have received a lot of well-deserved attention during the past two days. The non-partisan Urban Institute has confirmed what should really be obvious at this point--that an entire generation of Americans will be forced to cope with a drastically reduced standard of living as they enter middle age and into what were once referred to as their "retirement" years. The picture of what younger workers are able to save and accumulate today compared to their counterparts prior to the 1980's is shockingly dismal:
Source: Urban Institute (Thanks to nomandates who copied the chart for me)
Despite the Great Recession and slow recovery, the American dream of working hard, saving more, and becoming wealthier than one's parents holds true for many. Unless you're under 40.The Urban Institute report, titled "Lost Generations? Wealth Building Among Young Americans," examines trends in wealth accumulation between different age groups over a thirty-year time frame (a study examining the same trends between racial demographics will be forthcoming in the Spring).
The longstanding historical pattern of upward mobility, of course, is in keeping with the classic conception of the American Dream. For many Americans during the twentieth century that dream was very real, as past generations of American children generally grew up to be wealthier than their parents and each generation was typically wealthier than the one before it. For example:
[T]hose born in 1943-51 are wealthier than those born in 1934-41, who are wealthier than those those born in 1925-33.The policies that have shaped and continue to shape American society--and particularly, our Government's response to the economic needs of its citizens--have, for better or for worse, relied on that basic assumption. It's an assumption that informs the core of our identity as a nation.
But those days are gone. Young workers are neither successively wealthier than their counterparts of 25 years ago, nor are they gaining over time. They saw no benefit from the "doubling" of the U.S. Economy since the 1980's. And those directly in the heart of "Generation Y", age 29-37, have fared worst of all.
“In this country, the expectation is that every generation does better than the previous generation,” said Caroline Ratcliffe, an author of the study. “This is no longer the case. This generation might have less.” The authors said the situation facing young Americans might be unprecedented.Another author of the study, Gene Steuerle, attributes the decrease in wealth among young people to a number of factors (including, but not limited to societal wealth inequality) that have combined to create a "perfect storm" of financial insecurity for those under 40. These factors include:
A broad range of economic factors has conspired to suppress wealth-building for younger American workers; the trend predates the Great Recession. Younger Americans are facing stagnant pay — the median income, when adjusted for inflation, has declined since its 1999 peak — as well as a housing collapse and soaring student loan debt.
- a lower rate of employment when in the workforce;While the financial crisis tremendously aggravated the situation, the setbacks to younger workers did not start there. Older workers who had the good fortune to have purchased their homes prior to the housing "bubble" and did not flee the stock market when their 401k's crashed have seen their wealth levels gradually recover. Not so those under 40. Even assuming a robust economic recovery erases the economic reversals of the previous decade, for many of this generation it is simply too late--the compounding effect of time on accumulation of a "nest egg" of savings is unable to work its usual magic. There is simply not enough time available.
- delayed entry into the workforce and into periods of accumulating saving;
- reduced relative pay, partly due to their first-time-ever lack of any higher educational achievement relative to past generations;
- delayed family formation, usually a harbinger and motivator of thrift and homebuilding;
- lower relative minimum wages; and
- higher shares of compensation taken out to pay for Social Security and health care, with less left over to save.
Politicians of both parties are loathe to admit that America is in decline, even when the evidence is staring them in the face. For that reason the public policy discussion (Social Security, Medicare) has invariably skewed toward preservation of the health, wealth and economic status of retirees and near retirees. As the chart above demonstrates, these groups have already accumulated the lion's share of wealth during the past thirty years. There is no significant legislation addressing what is almost certain to be an economic calamity as millions watch their standards of living deteriorate. Instead what we see is this:
Education has declined in importance in public budgets, post-recession policy has tended to discourage access to homeownership, and pensions and retirement plans still prove inadequate if not in decline for substantial portions of the population.The Urban Institute offers a few, weak policy prescriptions, but what is ultimately needed is a resurgence in domestic investment and higher paying jobs:
With the wage and jobs picture bleak, and fixed pensions largely gone from the private sector, the answer to the conundrum of shoring up savings for younger workers might lie in new government policies, the Urban Institute scholars said. They suggested encouraging retirement accounts by making them automatic unless an employee opted out, or modifying the home mortgage interest deduction to push more money toward homeownership for lower-income workers.Of course retirement accounts, automatic or not, are only as good as what young people can afford to put into them. If their wages are being outstripped by the cost of living, health care, child care, etc., "automatic" enrollment in accounts won't make up the difference in any appreciable way. And a mortgage interest deduction for lower-income homeowners won't offset the skyrocketing costs of higher education.
For now, millions of younger workers are on their own.
Astonishingly, none of the media coverage of this report appears to allow for the possibility that this phenomenon may affect not only the current generation of twenty and thirty-somethings, but future ones as well. Each generation ultimately transfers what wealth it has (left) to the next, but as they live longer, the parents that these twenty and thirty-somethings will become are going to have little if anything left to pass on to their own children. That in turn will decrease their children's education and job prospects, and the vicious cycle of stagnation and downward mobility continues. Those families that have accumulated substantial wealth over the course of their lives will become more and more isolated socially, culturally and economically from those that have not, and the enormous levels of wealth the country is capable of generating will continue to concentrate into a small segment of the population. If that happens on a scale this large--and there is no reason to suspect that it won't (in fact it already is)--what we will likely see in twenty years is a nation that has become more and more impoverished, with a tiny segment clinging to huge amounts of wealth.
The implications of this trend are as obvious as they are alarming. A generation of aging Gen Y'rs without adequate means to sustain themselves through retirement will necessarily require a broader degree of governmental support, whatever the means. The current fixation of both political parties with curtailing "entitlement" programs in the name of deficit reduction --either by cutting benefits, raising the eligibility ages, or reducing cost-of living adjustments --is not only wrongheaded, but a recipe for societal suicide. If we don't invest our resources and modify our policies in ways that benefit our young people, the American Experiment is going to come to a very bleak end.