Thursday, October 26, 2006

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How bad off is Generation Debt?

Earlier this year I blogged about whether twentysomething were genuinely facing tougher economic times than their predecessors -- or whether they were just whiners (click here for the latest example).

There's been a few reports issued this month that touch on this issue... and the evidence ranges from mixed to favorable.

This report on asset accumulation and savings among young Americans by Christopher Thornberg and Jon Haveman suggest a worrisome trend -- Generation Y doesn't save as much as prior generations:

In 1985, about 65 percent of Americans aged 25 to 34 owned some form of savings instrument... including traditional savings, money market accounts, certificates of deposit, and other financial investments, such as stocks and bonds, Keogh, IRA, and 401(k) accounts. Between 1985 and 2000, the proportion of this population that owned one or another of these savings instruments fell from 65 percent to 59 percent, a decline of just under 6 percentage points. Between 2000 and 2004, the decline accelerated, when it fell another 4 percentage points, a pace two and a half times faster than in the previous 15 years.

This is consistent with a declining emphasis on savings within this group.... Table 2 indicates a decline in the use of regular interest-bearing savings accounts. At the same time the proportion of the population invested in stocks and bonds increased from 13.6 percent in 1985 to 14.7 in 2000, but dropped to just 12.8 percent in 2004. Those owning non-pension retirement accounts stayed roughly constant at just over 25 percent.

It is plausible that young Americans were more inclined to invest in the stock market between 1985 and 2000 because of the large returns that were available. However, this same logic would suggest a return to the safety provided by savings accounts in the early part of this decade, when the returns were not as good. Quite the opposite happened; the movement away from savings accounts continued.

An alternative explanation is a shift to other forms of asset accumulation, such as home ownership, real estate, or private business. Between 1985 and 2004, the rate of home ownership among these individuals increased from 37 percent to 39 percent, but ownership rates of other real estate and private businesses declined substantially.

Therefore, the explanation most consistent with observed declines in ownership of savings instruments is an overall reduced emphasis on saving....

The mean net worth for individuals between the ages of 25 and 34 increased by 4 percent between 1985 and 2004, much more slowly than income levels for this group. This is the exact opposite situation for the U.S. economy which has seen assets grow at a faster rate than income.

Sounds bad. However, Thornberg and Haveman dig into the reasons why young Americans aren't saving as much, and comes up with some interesting partial answers:
Contributing to the decline in median net worth are changes in demographic patterns among these young individuals. In particular, there are significant changes in three categories that are highly correlated with median net worth. Between 1985 and 2004, the proportion of the population aged 25-34 that was married declined by 8 percentage points, the proportion of whites declined by 17 percentage points, and the proportion with education beyond high school increased by 13 percentage points (Table 4). The decline in marriage rates and the increasing share of the population made up of people of color have contributed to the declines in net worth while increasing levels of education offset these declines. Taken together, these demographic shifts are responsible for just over one-quarter of the change in median net worth among young Americans.
Assets are only one side of the equation, however -- what about debt? Here the answer is more positive. The MacArthur Foundation has funded a study of Generation Y debt by Ngina Chiteji that suggests the Anya Kamenetz/Generation Debt thesis doesn't hold up:
Ngina Chiteji in her chapter in The Price of Independence takes a careful look at debt in young adulthood, finding that, contrary to popular perception, most of today’s young adults are not carrying an unusual or excessive amount of debt, at least not by historical standards or given their time in life, just starting out. The fraction of indebted young adult households age 25 to 34 has barely changed in 40 years, and while, in general, young households carry more debt than the population at large, this is consistent with the predictions of economic theory and most young adults appear to have manageable debt loads....

Because viewing debt levels or borrowing behavior in isolation may provide an inaccurate picture of the extent of the problem, Chiteji also asks not whether debt per se is a problem but whether there are young adults whose overall financial position is weak. About 17.5% of young adults could not meet three months’ worth of their existing debt repayment obligations with their current savings (if financial assets are used to gauge a household's savings). The comparable figure is about 16.5% if using net worth to measure household savings. Approximately 8.5% of young adults have no financial assets. Moreover, this group with no savings (or zero or negative net worth) owes almost $24,800 (on average), with an average monthly payment of $381. The median values are a bit lower—$14,650 and $300, respectively. However, these levels could still be considered troublesome given that these are households with no savings to cushion them should they lose a job or other sources of income.

As a whole, are young adults in trouble? On average, young adults use only 19% of their monthly income to service their debt. Typically, only households that need 40% or more of their monthly income to pay debts are considered to have burdensome debt levels (and to be experiencing "financial distress"). About 9.3% of young households are in financial distress, slightly lower than the 11% for U.S. households overall. Therefore, as a group, today’s young adults do not appear to have an unusually fragile or problematic financial situation. Young adult households are not remarkably different from other families in the nation. However, the research also finds that there are some young adult households whose financial situations appear troublesome. Policymakers and others certainly might want to direct their attention to these households.

Given that the data suggests --
a) More young Americans are buying homes;
b) More young Americans are going to college; and
c) "Young adults do not appear to have an unusually fragile or problematic financial situation."
-- I confess to remaining unpreturbed about the state of Generation Y's finances.

Question for Gen Y readers -- which report better conforms to you personal experiences and those of your cohort?

posted by Dan on 10.26.06 at 12:59 PM


Most young people I know do not have that bad of financial situations because they're still dependent on their parents. Most people I know are more profligate spenders than I am and may not save enough in the future, but I don't see my friends getting in unreasonable debt.

posted by: John Hall on 10.26.06 at 12:59 PM [permalink]

As for myself, a 26 year old, I can think of a major reason for lower savings. I'm in grad school, and I would assume that more of people my age are in grad school nowadays. You can't really save much when you're making a pittance living in an expensive city (San Francisco).

posted by: Joey on 10.26.06 at 12:59 PM [permalink]

Wouldn't the age distribution within the 25-34 bracket change over time, and make a big difference? Right now 34-year olds are from the relatively small Gen X cohort, and 25-year olds are from either the larger Gen-Y or the much larger Millenial cohort-- so the intrabracket distribution is skewed young, and ergo skewed against savings, marriage, etc. In 1985, the big bulge of baby boomers were 30-40-- so the intrabracket distribution was skewed old, pro-savings, and pro-marriage.

posted by: Jacob T. Levy on 10.26.06 at 12:59 PM [permalink]

Baby Boomer here... I remember they moaned and groaned about how WE didn't save enough, then how Gen X didn't save enough, now this. None of us save money like we should!

posted by: Miss Cellania on 10.26.06 at 12:59 PM [permalink]

I'm not saying that most Gen Yers aren't whiny and over-entitled, but I think there's something to the complaints for a certain segment of my generation. (I'm 25.)

Greg Mankiw has a post today noting that the financial returns to earning a bachelors degree are declining. I've noticed the same thing anecodotally among my friends: we're finding that we need masters degrees to get to the same middle-class place in life that our parents got to with bachelors degrees.

Add to that the fact that the cost of education has been going up faster than inflation for decades—the average annual cost of tuition, fees, room and board at a private four-year college is over $30,000 a year now—and you have a lot of 20-somethings spending more time in school, and paying more for the privilege, than you used to.

I don't think this is quite the crisis that Kamenetz makes it out to be, because once those 20-somethings get out of grad school and into their 30s they seem to wind up in pretty good financial shape. It's not that Gen Yers can't make it into the middle class; it's just that it's taking us more time in school (and therefore more time living the low-rent student lifestyle) to get there than it used to. But it's still not exactly fun to be 28 and still be living with a couple of roommates and dining on ramen, even if there's a light at the end of the tunnel a few years down the road.

posted by: JMB on 10.26.06 at 12:59 PM [permalink]

To be clear: Mankiw says "It appears that the return to human capital, which increased so much over the past three decades, is now leveling off" [where "now"= "last 5 years".]

That's not really the stuff of an epochal shift between Gen Y-ers' and boomers' professional prospects at comparable life stages-- there's no suggestion that the marginal return to a college degree is less now than it was thirty years ago, even if it is slightly less than was five years ago. And the post doesn't say anything about BAs vs MAs-- I remember the "An MA now is what a BA used to be" discussion being around in the mid-80s.

posted by: Jacob T. Levy on 10.26.06 at 12:59 PM [permalink]

I'm not struggling with my debt--but only because I live at home. Luckily, this happens to be more than culturally acceptable to me, but I know it's not culturally acceptableto many of my peers, who have either forgone amazing opportunities or are, in fact, struggling with debt. It's true we maybe in slightly less "financial distress" than the average household, but that seems to be because we tend to be, on average, much healthier and also have fewer dependants. If we happen, however, to get ill, especially chronically so, we are basically screwed--we usually have the high deductible health insurance, if any, and jobs that are much less tolerant of the side effects of chronic illness. In particular, I think my peers are deeply paranoid about falling into any kind of depression--we're the post-prozac generation, in that we believe that depression is an illness, but also believe it's very difficult to treat and next to impossible to get any solid help with without the aid of wealth.

Basically, most of the people I know are doing okay--but b/c they have circumscribed their lives to do okay. Weddings, children, and buying versus renting are all on hold. People are increasingly careful at taking care of their health (a good thing, of course, but sad when its the result of paranoia). I think we might be less likely to take risks than we would have been otherwise, b/c there is a strong sense that safety nets are disappearing. So basically, I think Generation Y is as financially healthy as it is physically healthy. A public health crisis disproportionately attacking 20-somethings would be more of an economic problem.

posted by: Saheli on 10.26.06 at 12:59 PM [permalink]

Skyrocketing costs of higher education. Stagnating wages for college graduates. Greater emphasis on private loans. Less aid. Less grants. Health care costs increasing.

So, while I may be the first to concede my generation's savings behavior is inadequate (like that of Americans generally), focusing on savings tells an impartial story.

posted by: mikey on 10.26.06 at 12:59 PM [permalink]

As a 27 year old, I'd say the more pessimistic scenario is in line with my own personal experience. But then I'm in ballet, not a field known for offering much fiscal security. Still, most of my friends have watched health care and insurance costs almost double in the last six years, have watched basic living expenses go up across the board without comparable jumps in income, and most of them frankly have little savings and considerable debt. I'd be curious to see data that gets away from mean and median averages and offers a closer look specific to separate demographics.

posted by: seth on 10.26.06 at 12:59 PM [permalink]

Economists Are Destroying America

Economists, politicians, and executives from both parties have promised American families that “free” trade policies like NAFTA, CAFTA, and WTO/CHINA would accomplish three things:

• Increase wages
• Create trade surpluses (for the US)
• Reduce illegal immigration

Well, their trade policies have been in effect for about 15 years. Let’s review the results:

• Declining real wages for 80% of working Americans (while healthcare, education, and childcare costs skyrocket)
• A record-high 46 million Americans who don’t have health insurance (due in part to declining wages and benefits)
• Illegal immigration out of control
• Soaring trade deficits, much with countries that use slave and child labor
• Personal and national debt both out-of-control
• Global environments threatened by lax trade deal enforcement

Economists Keep Advocating Policies That Aren’t Working

Upon seeing incontrovertible evidence of these negative trade agreement results, economists continue with Pollyannish blather. Some say, “Cheer up! GDP is up and the stock market’s doing fine.” Others say, “Be patient. Stay the course. Free trade will raise all ships.”

Even those economists who acknowledge problems with trade agreements offer us only half-measures—adjusting exchange rates, improving safety nets, and providing better job retraining. None of these will close the wage gap in America—and economists know it.

Why Aren’t American Economists Shouting From Street Corners?

America needs trade deals that support American families and businesses in terms of wage, environmental, and intellectual property abuses. Why aren’t economists demanding renegotiation of our trade deals? There are three primary reasons:

• Economists are too beholden to corporations and special interests that provide them with research grants.
• Economists believe—but refuse to admit—that sacrificing the American middle class is necessary and appropriate to generate gains in third world economies.
• Economists refuse to admit they make mistakes.

Economic Ambulance Chasers

Now more than ever, Americans need their economists to speak truth and stand up to their big business clients. Instead, economists sound like lawyers caught chasing ambulances: they claim they’re “doing it for our benefit”.

posted by: John Konop on 10.26.06 at 12:59 PM [permalink]

I'm 23, and I graduated college in May 2005. I graduated with around $18k in student loan debt and $10k in credit card debt, with probably less than $300 in cash. Without solid job prospects in hand, I joined the Army and have since paid back around $12k in my debt and have around $16k remaining. I still have zero savings in the conventional sense, but I do have $70k (from GI Bill and Army College Fund) that I can use towards law school or grad school when I finish with the Army, so maybe that counts as a type of savings.

I don't save - I'd rather pay back debt first, and income security in the military is really good, so it would pretty much take a serious criminal conviction for me to stop receiving pay, food, or housing from the military. My insurance covers everything medical, and pretty much all accidents that aren't caused by my own gross negligence. So I feel very financially secure (albeit with some non-financial insecurities about my personal welfare and safety), despite having a debt balance that is equivalent to 89% of my annual pretax income.

Most of my friends from college are choosing not to save, but they also don't usually have as much debt as me. In the event of illness or a loss in job or income, like Saheli said, many would find themselves in a pretty rough financial situation nearly overnight. I'd say we are quite comfortable with higher stakes and greater risks, because we tend to be optimistic about the future, and we aren't gambling with our spouses' and children's financial situation, since we mostly don't have spouses or children. I'm sure that as we age, we will make moves to make ourselves more secure, but it seems to me like it's more of an age thing than a generation thing.

posted by: Shane on 10.26.06 at 12:59 PM [permalink]


posted by: V on 10.26.06 at 12:59 PM [permalink]

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