The Millennial Financial Squeeze

If you talk to Millennials, a common theme is financial stress. This applies to Gen Z people as well, but they’re less far along in their adult lives, so I’m going to focus on Millennials. Most people I hear from in these generations take it as an obvious fact that they have it much harder than Baby Boomers and people in Gen X. But do they? This recent paper looks at the topic and concludes that each generation has seen income growth over the prior generations. They concluded that Millennials make 18% more than GenXers after adjusting for inflation. On the other hand, there are plenty of contrary articles like this one that show a “staggering millennial wealth deficit.” What’s the truth?

One obvious difference between those two articles is that one is focused on income and the other is focused on wealth. Both may be correct. Just because someone earns more money doesn’t mean that they have a higher net worth. Is the problem not a lack of income but a lack of savings? Or is this a case of people misusing data?

For an example of how incomes and net worths can diverge, let’s look at the median adult’s net worth by country and income. You’ll quickly see some surprising results. The median income in Germany is almost 25% higher than in Italy ($33,288 vs $26,713). But when we look at net worth figures, the results are reversed. The typical Italian has a net worth 61% greater than the typical German ($107,315 vs $66,735)! The stereotypes are not that Germans and spendthrifts and Italians are frugal, so how is this possible? Some of the difference between the two is because the homeownership rate in Italy is 73.7% and in Germany it is only 49.1%. There is also an age difference, with the average Italian being about 1.4 years older than the average German. Comparing the wealth between two groups is tricky.

Let’s look more closely at the “staggering millennial wealth deficit.” I found it odd that they aren’t directly comparing different generations’ wealth. Instead, they are comparing their share of national wealth. If you want to see how wealthy each generation is, wouldn’t it be more appropriate to compare the actual level of wealth for each generation rather than their share of national wealth? Given that national wealth changes over time, it doesn’t make for a good basis for comparison. For example, when looking at the baby boomer’s share of national wealth in 1990, that’s their share relative to older generations that grew up in the Great Depression and WWII. 

Fortunately, the article links to their source, a Federal Reserve data set on the Distribution of Household Wealth in the U.S. since 1989. That report lets you choose between “shares” and “levels”. By switching to levels, we can compare the actual level of wealth in dollars across generations. Like the article, we’ll want to compare their wealth at similar ages, but we don’t have a lot of overlap. We only have one age for which we have data for Boomers and Millennials, which is when they were 35 years old. That is 1990 for the Boomers, 2008 for GenX, and 2023 for Millenials. Even that is a stretch because we have to use the average age for each generation. Looking at the chart, the generation’s total net worths at age 35 net worths are $6.05 trillion, $9.81 trillion, and $20.17 trillion. But those numbers aren’t adjusted for inflation. Using CPI-U to adjust them to 2023 dollars, those numbers would be around $14 trillion, $14 trillion, and $20 trillion. That tells a very different story than the “share of national wealth” graph.

But the problem is even worse. The comparison is between the total wealth of each generation. The fortunes of the super-wealthy skew those comparisons. The different population sizes also ruin the comparison. A better look would be to compare the median net worth of people by generation. Fortunately, the Federal Reserve has a chart we can use for that in their Survey of Consumer Finances. This chart, which is updated in 3-year increments, tells an interesting story. Every age group shows variations in net worth from 1989 to 2007, but then by 2010, they are all down substantially. The obvious reason is the 2008 recession and more specifically the decline in home values, which is a large component in household net worth. The values got a huge boost between 2016 and 2019 and then again in 2022 as the economy and home prices recovered. All in all, I don’t see anything in the chart that shows younger generations as outliers compared with earlier generations, either for being much poorer or much richer.

If inflation-adjusted incomes are significantly higher for Millennials and their net worths are significantly lower, why is it such a commonly held belief among them that they are worse off financially? A couple of sentences in a recent Scott Sumner blog post gave me a clue as to what I think is the main reason. In talking about inflation, he said “Thus the BLS [Bureau of Labor Statistics] says that the price of TVs has fallen by more than 99% since 1959 (due to quality improvements), but average people don’t think that way. They want to know how much more it costs to buy the sort of TV their neighbors have, not how much more it costs to buy the sort of TV their grandparents had.” I think that is the key. We’re adjusting incomes based on an economist’s definition of inflation rather than the cost of maintaining a lifestyle on par with your peers.

Let me go on a quick tangent. It will eventually tie back in. When I was a child in Houston back in the early 1970s, I rode in the third row of a Volkswagen Beetle. For any of you familiar with Beetles, that might sound surprising, because they were tiny cars with only 2 rows of seats. My “seat” was the luggage compartment behind the rear seat. It was sandwiched between the sloping rear window and the air-cooled engine. If you drove around with your child like that today, child protective services would pay you an unpleasant visit. Back then, it was unremarkable. In that era, it was also not unusual for me to go out and play all day, maybe hanging out at a friend’s house, then biking to the neighborhood pool for a swim, then hiking along the creek with friends. Elementary school-aged children regularly managed their own time in the summer and stayed out all day without cell phones or regularly checking in with their parents. Doing that in a typical middle-class suburb today is virtually unheard of. Standards for what is normal have changed.

Now let’s get back to Scott Sumner’s point about TVs and see how it relates. Today, if you have a family of 6, you can’t go driving around in a Volkswagen Beetle. Even in there are states where it isn’t expressly illegal, it is simply not socially acceptable. The same is true for letting your children play unsupervised all day. It’s just not something that people do anymore. Just as Professor Sumner points out people don’t compare TVs today with what their parents or grandparents watched, there are a lot of other societal changes that influence our spending decisions.

When I was a child, no parents bought cell phones for each member of the family. The main reason was that cell phones didn’t exist. But it was possible to install a separate phone line in your home so that each person could have their own phone. Nobody I knew did that. I don’t know anyone who had 2 phone lines in their home before the computer age. We all behaved according to the expectations of our social status and one of those expectations was that you should have a phone for your house and that one shared phone was enough. Today, hardly anyone thinks that it is OK to share a phone with other teenagers or adults.

Going to a restaurant was a relatively rare treat for us. I can’t be sure that was because of the cost and not the unpleasantness associated with having four children at a restaurant. I don’t think going out to eat multiple times a month was common back then. Picking up take-out was rare and, except for pizza, having restaurant food delivered to your house was unheard of. Restaurant-prepared meals were an uncommon luxury for us when I grew up. Maybe my friends were going out to eat several times a week and I just never knew because my friends didn’t post pictures of their meals online. And that last part may be a reason that social expectations for spending have risen faster than incomes.

Throughout history, we have all compared ourselves with our peers. But with social media, those comparisons are more common and more in-your-face. On top of that, advertisers have gotten much better at influencing us. Is it possible that those two forces have been ratcheting up our expectations for what is an acceptable standard of living? 

I think that another contributing factor is the greater availability of credit. In 1995, the average duration of a car loan was about 54 months. I don’t think you could get a car loan for more than 60 months. Today, the average duration is 65 months. Nobody is forcing people to buy more expensive cars, but if you can finance over a longer period, they don’t seem much more expensive and when all of your friends are buying $50,000 cars it doesn’t seem outrageous for you to do the same. The fact that it has gotten easier to borrow money and more socially acceptable to be in debt may be normalizing higher spending-to-income ratios. 

Student loans may be another factor. Before we had student loans, fewer than 8% of the population earned a college degree. Now, we are getting close to 40% of the population earning a college degree. What was once something reserved for a fairly small part of the population is now something expected of more people. Why college costs have increased so much, whether having 40% of the population graduating from college is optimal, and whether college is still a good financial move are all interesting topics outside the scope of this article, but what is clear is that it is another example of increasing socially mandated spending. Someone who may have been happy with a non-college career now will be guided by their parents and peers to go deeply into debt to obtain a degree. 

So what’s the answer? Are Millennials better off or worse off? In a direct material comparison, it is clear that they are better off. They have higher incomes, higher levels of education, and net worths on par with or higher than prior generations. But that doesn’t mean that they aren’t more financially stressed. Expectations have risen along with incomes and expectations matter a lot. If you don’t think so, try explaining to someone poor in the United States that they are very wealthy compared to most of the people who have lived through history. When you finish your explanation, they’ll still believe (rightly so) that they are poor. When your generation is living closer to the financial edge, it is hard to maintain what seems an acceptable living standard while not also living near that edge.

What should you do if you are a Millennial who feels financially squeezed? The answer is the same simple answer that has applied to every generation. You need to find a way to keep your expenses far enough below your income to allow you to retire when your body is too old to keep working. Failing to do so isn’t immoral. It isn’t a crime. It isn’t hurting anyone else. Failing to do so is putting your future self in a situation where they are forced to make spending cuts that are probably a lot less pleasant than the cuts you should be making today. That has been the case for everyone at least as long as we’ve had the expectation of retiring.

I had to redo several sections of this as I wrote and researched it because my prior assumptions were wrong. I thought it would be informative to share a few of those. I wanted to include a section about the outrageous amount of money that young people are spending on engagement rings and weddings. When I looked into it, the inflation-adjusted price of engagement rings and weddings actually appears to be trending down rather than up. Surprise! Those spendthrift young people aren’t always spendthrifts. In my bit about cars, I was going to include something about how people are buying more and more expensive cars today because of higher social expectations and easier credit, but car expenses as a share of income appear to be trending down. People are buying nicer and nicer cars, but cars are getting cheaper faster than they are getting nice. Surprise! I’d love to see detailed budget comparisons between random families in different generations so that we could more readily see where their spending differences are, but I didn’t find an easy source for that comparison.

I also found this study - The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly - interesting and wanted to work it in, but it didn’t fit the narrative. The most interesting part is this chart on the inflation rate if we had continued to calculate housing inflation the way we did before 1983. Back then, we compared the price of houses and mortgage interest rates. But that was misleading in a lot of ways, so now we look at changes in “imputed rent” - the amount it would cost for a homeowner to rent their house. We can’t easily go back and see what the 1970s would have looked like under the new standards, but we can see what modern times would look like under the old standards. We would have reported peak inflation of around 18% last year under the old standard!