Is Retirement Already Out of Reach for Younger Generations?

The Federal Reserve recently defended its highly accommodative monetary policies by pointing towards low inflation and high unemployment levels. The central bank’s actions have caused a perceived wealth effect by pushing equity and home prices higher, but younger generations are not participating in the rebound.

When it comes to building wealth, those under 40 years old lag behind their parents’ generation, according to a new report from the Urban Institute, a nonprofit Washington research firm. Despite the greatest financial crisis since the Great Depression, the average household net worth almost doubled between 1983 and 2010. However, the average inflation-adjusted wealth in 2010 for those born after 1970 was 7 percent below similarly aged individuals in 1983.

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“If these generations cannot accumulate wealth, they will be less able to support themselves when unexpected emergencies arise or when they eventually retire,” the researchers observed. “This financial uncertainty could reverberate throughout the economy, since entrepreneurial activity, saving, and investment tend to build on a base of confidence and growing wealth.”

An old pattern is broken…

As the economy grows and society gets wealthier, children are typically wealthier than their parents, and each generation grows to be better-off than the previous one at any given age. For example, those born in 1943-51 are wealthier than those born in 1934-42, who are wealthier than those born in 1925-33. However, this pattern does not hold true anymore.

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As the chart above shows, people born in 1952 do not find themselves wealthier than the prior cohort by 2010. The case is also true for those born between 1970-78.

To put it another way, the report explains, “More generally, the net worth of those 47 and older is roughly double that of someone the same age 27 years earlier. Today’s adults in their mid-30s or younger — the prime time for career and family formation — benefited little from the doubling of the economy since the early 1980s and have accumulated no more wealth than their counterparts 25 years ago.”

The Great Recession did not help the situation with younger generations, but the problem started years before the recent crisis…

The report offers the following headwinds:Screen Shot 2013-03-21 at 12.30.30 AM

A lower rate of employment when in the workforce.

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.

Their delayed family formation, usually a harbinger and motivator of thrift and homebuilding.

Lower relative minimum wages.

Higher shares of compensation taken out to pay for Social Security and health care, with less left over to save.

As we have noted before, the expanding student debt bubble is weighing on the younger generation as well. FICO, a company that provides analytics including credit scores, recently conducted a study to examine changes in student loans since 2005. To little surprise, the results were quite sobering. The sky-rocketing costs of college have been outpacing inflation for years. As a result, more Americans are taking out student loans to pay for their education. FICO finds that approximately 12 million Americans had two or more open student loans on their credit report in 2005. In 2012, this figure more than doubled to 26 million Americans.

In 2005, consumers in the United States with at least one open student loan on record had an average student debt load of $17,233. However, this debt load increased 58 percent to $27,253 last year. In comparison, all other debt categories combined only grew 4.3 percent.

Here’s how the market traded Friday:

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