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Young workers are increasingly saddled with credit card debt on top of student loans.

Young and in debt

  • 10Nov 17
  • Susan Anderson Senior Investment Strategist, Aberdeen Solutions

Millennials continue to struggle with heavy debt burdens.

“Blessed are the young, for they shall inherit the national debt.” Herbert Hoover

Today’s younger generation may well be discovering the truth of Hoover’s remarks as they adjust to living with the consequences of the 2008 financial crisis. Millennials – typically defined as those born between the 1980s and early 2000s- face lower levels of real income than previous generations. They work in an environment in which earnings are lagging behind inflation. And, with the rise of the “gig” economy and zero-hours contracts, these earnings are often less predictable.

Some are simply throwing up their hands at this point.

Weighed down by debt

Along with these challenges, younger workers are in many cases struggling with large amounts of debt. According to a study conducted by the Federal Reserve Bank of New York, the reason for a marked decline in home ownership by individuals in the U.S. aged 28 to 30 is the burden of student loans, combined with a rapid increase in the price of college tuition. Since 2009, the total amount of student debt has doubled to more than $1.4 trillion. And as younger workers struggle with paying off their debts, many remain underemployed due to entering the job market during and immediately following the global financial crisis. Some are simply throwing up their hands at this point. More than half of students who left college in 2009 had either defaulted, missed at least four months of required payments, or were facing higher loan balances five years later.1

In the UK, the ready availability of credit, coupled with a squeeze in wages, has led young adults to embrace credit to buy day-to-day essentials. According to research conducted by accountants PwC, one in five 25-to-34 year olds admitted to turning to credit for this purpose, compared with 6% of those over 55. The young are experiencing increasing student debt pressures as education tuition fees the interest paid on them continues to rise. At the same time, real earnings have fallen more than 10% for 22-to-39 year olds.

Citizens Advice says there has been a 34% rise in the past two years in the number of those under 25 seeking help with high-cost credit – including payday loans, rent-to-own loans, overdrafts and cataloge credit. Unsecured household debt in Britain, including credit cards, overdrafts and car loans, recently topped £200 billion (US$262.5 billion) for the first time since the autumn of 2008.

Levels of personal asset ownership are declining

As one might expect, high levels of debt are hurting savings rates among younger workers. A 2017 survey from GoBankingRates found that 67% of “young millennials” (ages 18 to 24) in the U.S. have less than $1000 in savings, while “older millennials” (ages 25 to 34) aren’t faring much better, with 61% reporting they have less than $1000 in savings.2

Trends in retirement savings plans aren’t helping either. Defined benefit plans (such as pensions) are becoming increasingly rare, with most of the responsibility for retirement savings landing squarely on the employee, rather than the employer, in the form of defined contribution plans, such as a 401(k) account.

Levels of asset ownership are generally significantly lower, too. Owning a home used to be part of the route to adulthood. For young people now though, the prospect of home ownership has drifted further and further away since the financial crisis of 2008.

According to credit reporting agency Experian, more than one-third of Americans ages 18 to 34 said they are likely to opt out of home ownership over the next decade. This makes sense, in that many are putting off marriage and children, and even moving out of their childhood home, until later in life. According to the Census Bureau, 55% of 25- to 34-year olds live with a spouse or partner, compared to 80% in 1967. And Pew Research analysis from 2016 showed that 15% of 25- to 35-year olds lived with their parents, compared to 10% of Gen Xers who lived at home in 2000 when they were the same age.

In the UK, a 2016 Office for National Statistics (ONS) report on housing affordability revealed that, on average, working people could expect to pay around 7.6 times their annual earnings for a home compared to 3.6 times in 1997. As house price inflation has significantly outpaced wage inflation over the same period, it’s no wonder that the younger generation are renting. This in turn has had a knock-on effect on demand for rental property and pushed up rental prices dramatically. Data produced in 2016 by the Money Advice Trust revealed that the cost of renting a one-bedroom property has risen so high that young people are paying up to half of their take-home pay on rent.

The generation gap

For the last 10 years, a generation of younger people have lived in a low-inflation, low-growth and low-interest-rate economy that offers them little incentive to save or acquire assets. Encouraging a savings and home ownership culture in a generation which has indeed inherited the national debt and struggles to own assets is a worrying trend for capitalism. These developments could cause major deterioration in consumer spending and have significant negative effects on long-term economic growth.

In a world where amassing debt is so much easier than amassing capital, it is necessary to start looking at possible solutions, or the generation gap may only widen.

1Student debt is major reason millennials aren’t buying homes.” Bloomberg. July 17, 2017

2Here’s how much money the average millennial has in savings.” CNBC, September 14, 2017.

ID: US-081117-50716-1