Millennials are foolhardy spendthrifts. But young people basically always are, and that’s probably okay.
A new analysis of savings rates — calculated by Moody’s Analytics, and based on Federal Reserve data — has gotten a lot of attention for the sharp division it shows between the financial habits of Kids Today and those of everyone else. Older and wiser Americans are prudently building up their nest eggs, producing savings rates of 3 percent among people age 35 to 44, 6 percent among people 45 to 54 and 13 percent among those 55 and older.
Financially profligate 34-and-under types, on the other hand, exhibit no such provident penny-pinching. Not only is my generation not saving anything, we’re spending more than we bring in: We have a savings rate of negative 2 percent, which means we’re burning through assets or taking on debt.
These numbers have inspired various condemnatory headlines and think pieces about my generation’s irresponsible savings deficit. The more sympathetic coverage has at least acknowledged the effects of student loan debt and high youth unemployment, but even those articles came loaded with judgment.
The Wall Street Journal, in its coverage, selected as a prototypical example a heavily indebted, 26-year-old college grad in Southern Maryland. So quick is she to fritter away her funds that most of her paycheck “doesn’t even make it to a conventional bank account.”
Instead, the story notes, her earnings have been drained by “a trip to Central America, a wedding in Southern California, a bachelorette party in Austin, Texas, trips to Atlanta and Charlotte, N.C., to see friends, another bachelorette party in Austin.”
What frivolity! What indulgence! And what unrepresentative bunk.
If you look at all of Moody’s data, going back several decades, you’ll notice that young people almost always have had a negative savings rate, with “dissavings” for earlier generations of youth far worse than that among today’s supposedly irresponsible millennials. The only brief periods when people 34 and younger were successfully socking away savings were two years in the early 1990s, and then again from 2009 to 2012, when every age group’s savings rate went up.
“That’s not atypical,” Mark Zandi, chief economist at Moody’s Analytics, told me. “When the economy is bad we see a lot of precautionary savings, as people get panicked and run for the bunker.”
Ideally, Americans of all ages would have some funds stashed away for a rainy day, well before a “Great Recession”-level tempest rolls through. But it shouldn’t be surprising that the young are historically so bad at saving.
Maybe immature whippersnappers haven’t yet learned to make tough, self-denying decisions. Also consider, though, that they’re in the early years of their careers — about two decades ahead of their peak earning years — yet are reaching huge, expensive life milestones such as having kids and buying their first homes. Three-quarters of first-time homebuyers are younger than 33, according to the National Association of Realtors.
The unfortunate synchronicity of these two factors (entry-level pay, costly life milestones) suggests that young people will almost always have lower savings rates than their elders, even before you consider other factors such as student loan debt and exotic bachelorette parties. If youth is wasted on the young, perhaps positive cash flow is wasted on the middle-aged. In any case, if you believe that people make spending decisions based on how much they expect to earn over the course of their lives — one of the landmark concepts that won Milton Friedman his Nobel Prize — it’s not so troubling that Americans have low to negative savings rates when they’re young.
That’s not to say there aren’t cohort effects, in addition to the life-cycle effects I just mentioned. People whose formative financial years were shaped by the Great Depression, the so-called “Depression babies,” tend to be more risk-averse and have higher savings rates, after all. Given that millennials just went through a similar, if milder, period of economic turbulence, we may end up far more miserly than the legions of boomers now maligning us for our purported prodigality — not to mention our moral decadence, grating music and frowzy fashion sense, among other standard young-person sins.
“The boomers didn’t live through any kind of terrifying economic event like this, and were more carefree and willing to spend,” Zandi said. “They also lived through a period of rapidly rising asset values, so they felt like they were wealthy and could get by without saving as much.” As a result, he added, “millennials may well end up being more cautious than their parents, financially speaking.”