Are we headed for a poorer United States? has been saved
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Millennial households in the United States have fewer assets and lower income than older households, which is a concern. Technology could come to rescue by improving productivity and helping people earn more, says Patricia Buckley.
It's not a shock that younger people have fewer assets and lower income than older households. But what's striking is that the gap between these younger households and other age groups has been growing.
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Tanya Ott: I’m Tanya Ott and today we’re going to dig into some new numbers that raise some serious questions.
“A house is made of bricks and beams. A home is made of hopes and dreams.” I’m not sure who to attribute it to, but there’s a lot of truth in that saying. My husband and I were 27 and had a toddler when I bought our first home. Full disclosure–it was a townhome that we purchased from my parents at below market price. Thanks, mom and dad!A few years later, we traded up to a single-family home on a quarter acre, and by our mid-30s, we traded up to four bedrooms and two-and-a-half baths on a wooded suburban lot. We had to pinch pennies with every move, but we made it work because we were earning more and we didn’t have student debt. It’s been a little tougher road for millennials coming up right behind us.
Robbie Medwed: My name is Robbie Medwed. I'm a 36-year-old middle-school teacher in Atlanta, Georgia, and I'm just now starting the process of looking for a house.
Krista Diaz: Hi, my name is Krista Diaz and I live in Lyons, Colorado. We currently do not own a home because when we moved out to Colorado, we found that housing prices were much higher than when we lived in Indiana.
Robbie Medwed: I had never really thought about owning a house before because I had been a freelance educator, consultant and writer, and never really had the financial stability to put down any kind of meaningful down payment. I always expected that everything else past that would just be too out of my reach.
Krista Diaz: Growing up, my parents always owned a home and we never had to rent. It's always been a desire to own a home and I always see renting as kind of throwing away money because you're not putting [anything] into investment; you're just paying someone else for you to live in their house. Our generation just doesn't have the credit or the finances that our parents did because the housing market has just grown so exponentially.
Robbie Medwed: It wasn't until recently that I sat down with a financial planner and my parents, and I realized that this was actually something possible.
Tanya Ott: Numbers from the Federal Reserve suggest it actually is much harder for today’s young people to buy houses and acquire other kinds of wealth than it was when their parents were the same age. I dialed up Patricia Buckley to walk us through the numbers.
Patricia is Director of Economic Policy and Analysis for Deloitte Services LP. Before that she was an economic policy advisor for several White House administrations, so she’s been digging deep into numbers for a long time.
Patricia Buckley: Most of my life. That's [the] reason I'm an economist: I like [numbers].
Tanya Ott: Let's talk about growing wealth inequality. First of all, why did you want to take a look at this issue?
Patricia Buckley: The Federal Reserve comes out once every three years with a survey of consumer finance and it's one of the richest datasets we have tracking all types of wealth and income categories, by different ways of breaking down. You can look at percentile distribution. You can look at distribution by whether you have children in the home. The one that I'm most fascinated by are the breakdowns by age groupings [and] looking at how that changes over time.
Tanya Ott: Before we dig into those numbers, I want to have you just define what wealth means, because income is not wealth. Wealth is something different.
Patricia Buckley: True and we usually talk, when we're talking about inequality, we generally talk in terms of income inequality. But if you look at wealth inequality, it's an even bigger gap. Income is just the money you earn each and every year. With wealth, you add the money that you have saved with the assets you've accumulated–your car, stocks that you own, home equity, business equity–and from that you subtract your liabilities–credit card debt, auto loan, your home mortgage.
Tanya Ott: When you were poring over these numbers from the Federal Reserve survey of consumer finances, you were looking at data around wealth and you found that younger households, those headed by someone 35 and younger, are not faring as well as young households from prior generations or prior datasets that you've looked at. This is kind of surprising because the stock market has been doing pretty well. Housing prices are certainly moving back up, maybe into perhaps record territory again. What's going on with younger households?
Patricia Buckley: It's amazing to me because it's not a shock that younger people have fewer assets and lower income than older households. But what's striking is that the gap between these younger households and other age groups has been growing. Not only are they less likely to hold stock, but those that do, hold much lower-valued [stock]. They have smaller stock holdings. And you can just imagine this translating over time. Somebody who was 30 in 2004 [was] 42 in 2016 when the last survey was out. What we're beginning to pick up is that the less you've been able to accumulate in your younger years, it's starting to creep up the age ladder. Unless some of these trends change, the worry is that over time, as all these age groups move through time, we're going to be a poorer United States.
Tanya Ott: I want to get to that in a minute. You mentioned this idea that there's this bigger gap. The wealth gap between the different age groups is really striking. I'm in my late 40s and I bought my first home in my mid-20s and I now work with a whole bunch of really talented professionals in their 20s and mid-30s, and not one of them owns a home.
I asked a few of them why, and I heard things like I really want to live in the city, I don't want to live in the suburbs and that's where I could possibly afford a home. Or, I don't make enough to buy a home or to save for a down payment. One person even said, I don't think I'll ever be able to afford a home. You've got millennial kids of your own. Is that the kind of thinking that you're hearing from them or from their friends as well?
Patricia Buckley: Yeah, it's a challenge. My son lives in Denver right now, and he and his girlfriend are thinking of moving back to Salt Lake City where my daughter lives because housing prices are reasonable. They're in their late-20s and it's like, eventually I want to own a home. But what's happening over time though is home ownership has been declining since 2004.
Tanya Ott: And not just with young people.
Patricia Buckley: Not just young people. Across all age categories, with the exception, I think, of the very oldest group, [which] rose slightly. This happened before the recession. From 2007 to 2009, homeownership started dropping rapidly and that was because of foreclosures. I really thought that that trend would reverse itself. But with the benefit of five or six more years’ worth of data, we see that no, the trend was exacerbated by the recession, but the trend that started in 2004 continues through now. It's a combination of not wanting and not being able to afford.
Tanya Ott: It's not only owning homes, though; it's also being less likely to own stock, which may not necessarily be that surprising [given] that those two things would go together. But why? Is that because younger people are less likely to be in jobs that offer, say, retirement plans or ways to really sort of introduce them to the stock market?
Patricia Buckley: One of the reasons is their incomes haven't been rising, so they just don't have the wherewithal to be purchasing the stock or investing in a home.
Tanya Ott: Are their incomes rising at a noticeably lower level than previous generations of young people?
Patricia Buckley: Yeah. It's a longer-term trend. If you go back to 1992 to 2016, the median household income of those households headed by someone 35 or younger was declining over that long period of time. So, it's not surprising, with no increase to real income, that you don't have the money to be investing in things that are increasing in value, like stocks and homes.
Patricia Buckley: These would be cases where they're building toward something. When people think of small businesses, a lot of times they get it confused with new, fast-growing businesses. Not that there's anything wrong with small businesses, but if you want to look at where the dynamism in an economy comes from, it's from the businesses that are new and grow quickly. The fact that fewer of the younger households hold this type of equity, their own business equity, is really worrisome going forward because when you think of the United States, one of the things that internationally usually comes to mind is [that] entrepreneurship is really important.
Tanya Ott: Right. The economy is largely built on businesses, business equity and entrepreneurship.
Patricia Buckley: Yeah, and the fact that for the under-35 households that that's been declining is really worrisome. And it's not even relative to anybody–it's declining absolutely.
Tanya Ott: Right. Is that tied to, say, the enormous student debt that young people have coming out of college over the last couple of decades, which is significantly higher than for people coming out of college when I graduated in 1992.
Patricia Buckley: Right. I think that the student debt issue is incredibly important because when you go and try to find financing, one of the things people want to know is, what is your personal financial situation.
Tanya Ott: Right, and when you've got a big student debt looming over you, you can't get financing for that small business that you'd like to start.
Patricia Buckley: Right. Even making yourself attractive in the venture market becomes harder. Then the fact that on top of that, your incomes are relatively lower, so it's not like you can take the money yourself to get started and clear your balance sheet and get rid of the debt.
Tanya Ott: What are the implications in this scenario as we see the wealth gap between young people and older people growing at such a fast clip for things like Social Security and for Medicare–those social safety nets that depend on taxing income in order to fund them?
Patricia Buckley: It's going to make an already very difficult problem even more difficult because then you got to start thinking of intergenerational equity.
Tanya Ott: What do you mean by that?
Patricia Buckley: How much does the current set of younger households owe prior generations [who] actually were able, on average, to accumulate more wealth than it looks like they [younger generations] will ever be able to?
Tanya Ott: So, they're in a potential spiral.
Patricia Buckley: Spiral might be too tough, but when you start talking about the trust funds … and I think the Social Security trust fund doesn't have that many years left in it because at some point in the relatively near future, probably five or six years, not that long, the amount of funds flowing out of the trust fund will exceed the money flowing into it. At that point, by law, there's no way to pay for security checks.
Tanya Ott: We've been talking about this for a very long time. It seems like we talk about it a lot, but we haven't really heard much about what's going to happen at that tipping point. Does it go away?
Patricia Buckley: No! It's a problem. The problem gets more acute. I think in the Reagan administration there was some attempt–there was the raising of the retirement age. It was 65 ...
Tanya Ott: Then 67 ...
Patricia Buckley: Yeah–which helped some and pushed the problem down the road. But we're growing more slowly and if people's incomes aren't rising, how much you can collect from the payroll tax becomes limited.
Tanya Ott: Is it possible that we could just be in sort of a medium-term cycle and that home-owning, stock-buying and business-creation might tick up for younger Americans in the next decade? Or do you think this is kind of the new normal, sort of a permanent situation?
Patricia Buckley: One would hope that it would, but that would require doing something about the way we finance higher education, because the rise in student debt is not helping across a wide spectrum of reasons.
Tanya Ott: That's the one thing you think a lot of this really hinges on is how we finance higher education, so [that] we don't have graduates coming out with hundreds of thousands of dollars’ worth of debt in some instances and really having no chance of paying it back.
Patricia Buckley: Yeah, there's no way from these data or any other data that I could find that one could actually tie it directly in a statistical way that you could prove causality, but it just makes common sense that if you're graduating with a lot of debt, your ability to accumulate assets to help fund your own future retirement becomes more limited.
Tanya Ott: In the data that you're seeing here in the United States, do the same trends hold in other industrialized countries? Are we seeing this in Europe and other places around the world?
Patricia Buckley: We're seeing rising income inequality, but they don't have the particular issue we have with student loan debt.
Tanya Ott: So that makes it easier for them perhaps to acquire wealth, even if you know their incomes aren't as high, because they could buy homes, they could acquire wealth, is what you're saying.
Patricia Buckley: Yeah. There are just so many differences in how they finance health care, old age and retirement.
Tanya Ott: Anything that I didn't ask you that you want to add on this? Any other thoughts? It sounds a little dismal for the future but maybe not. I don't know. Convince me.
Patricia Buckley: I do a lot of economic outlook presentations and the thing I get really depressed about is the rate of productivity growth. It's been so low, really low, for the last few years, and for the economy to grow that's got to turn around. I'm not sure what it will take for the new technologies we are creating to transform [themselves] into uses that actually allow us to produce more goods and services with the same amount of labor, but you just have to be sort of ... We've had these periods of low productivity before and it's occurred in periods where you see a lot of technological change, so it just takes a while for the new technologies to transform themselves into something that shows up in the productivity numbers. If productivity were to rise, then there would be the ability for the system basically to allow people in all different age groups to start earning more.
Tanya Ott: Right, OK. Thank you for helping us kind of dive into these numbers even if they are a little bit disheartening, I guess.
Patricia Buckley: Yeah. Well income inequality and wealth inequality is a huge and growing problem.
Tanya Ott: Thanks for your time. I appreciate it. You have a fantastic rest of your day.
TANYA OTT: Patricia Buckley writes about the growing wealth inequality in an article titled Are We Headed for a Poorer United States?. You can find it at deloitte.com/insights. You can find us on Twitter at @DeloitteInsights and I’m on Twitter @TanyaOtt1.
I am Tanya Ott. Thanks for listening and see you again in two weeks.
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