This blog summarizes the working paper by William Gale, Hilary Gelfond and Jason Fichtner that was originally published as part of the Peter G. Peterson Foundation's US 2050 Research Projects.
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 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.
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.