For every Robinhood brokerage account-holding young investor
who has used newfound financial savvy to cash in on the rapid bull market and
new S&P 500 record, and every highly compensated young tech worker at
today’s dominant companies, like newly minted $2 trillion Apple, there are
likely to be many more younger Americans making little, if any, progress on
their personal finances.
That’s not general pessimism about the future. It’s not a political
statement about Wall Street being out of touch with Main Street — again. It is
the conclusion a team of academic researchers specializing in financial
literacy came to after pouring over a decade’s worth of data covering the lack
of economic progress made by younger Americans in the growth years that
followed the 2008 financial crash.
And it leads the researchers to issue a warning: If the
stock market gains are not short-lived, and the U.S. economy recovers its
footing more strongly and quickly that many thought possible after Covid-19, we
may soon see another “lost decade” for the millennial generation when it comes
to decreasing debt levels, saving more, and staying away from crippling
decisions like tapping retirement plans early.
While economic experts are closely watching the current data
on personal finance as a way to gauge recovery from the coronavirus crash,
Annamaria Lusardi, university professor at George Washington University and the
academic director of its Global Financial Literacy Excellence Center, said the
more important financial data covers the full decade of 2008-2018 and Americans
between the ages 18-37. It recently became available as part of a long-running
study she works on, the National Financial Capability Study.
“This is more important than the latest data because this
data was about a time in our economy when people were supposed to be doing very
well. This decade was all expansion, and the unemployment rate came down. This
is a time of boom and the stock market was roaring up,” said Lusardi, lead
researcher on a new paper analyzing the millennial experience during the
previous boom years. “The millennial generation is incredibly important. They
are already the largest and will shape our future and that’s why we focus on
them, and at a time of boom, this generation was doing so poorly.”
The national study is conducted each three years, first in
2009 and currently with data through 2018, across a sample of 25,000 Americans.
Not a temporary financial anxiety problem
Lusardi says what is clear during the Covid crisis is that
many younger Americans entered it already in a terrible financial situation,
whether measured by general level of financial stress, which is an issue for
millennials on a global basis, or more specific indicators like levels of debt
and lack of liquidity.
“They were already financially stressed well before this
crisis happened. They couldn’t face a small shock let alone a big one. This is
not a temporary problem, it is a structural problem and we need to use crisis
to concentrate on these weaknesses,” she said.
Sixty-three percent of younger Americans in the study said
they felt stress when thinking about their finances.
Use of alternative financial services, including payday
lenders, pawn shops, high-interest auto loans, rent-to-own housing finance, and
reliance on tax refunds to make ends meet, all show up in the data, with 43%
indicating use of high-interest loans and alternative liquidity options.
“This is not behavior on the fringes. The share of
millennials using these services has increased over time. ... The numbers should have gone the
other way. There is no reason why people should have been doing worse 10 years
after 2009. Why are people still using a payday lender 10 years later?” she
said.
Even in areas associated with good financial decisions, the
portrait from the data is concerning.
Among millennials that own a home, the data shows them to be
highly levered, with over 20% having taken out a home equity line of credit.
Among those with retirement accounts, over one-third (33%)
tapped into those accounts early during a period of life when the focus should
be on contributions, and that percentage increased throughout the decade of
economic growth.
Now with the CARES Act removing penalties to withdraw
retirement plan funds early, Lusardi suspects the current crisis will lead even
more millennials to “effectively destroying their nest egg,” she said. “It was
already getting worse and it will keep getting worse over time, and we are not
talking about people close to retirement. We’re talking about people not even
30. ... People raid retirement accounts and we are going to push the problem
down the road.”
There are increased levels of people with a college
education, but the data shows student loans highly connected with financial
anxiety — over half (51%) of millennials with loans are concerned about paying
them off.
“People are starting their economic life in debt today,”
Lusardi said. “Student loans. If you start making late payments and take up too
much debt, it can have consequences in all other financial behaviors ... paying
late on credit cards and seeing a credit score decline and you’re in a
financial situation that continues to be worse and worse.”
Over 60% of those surveyed said they incur late fees and
other charges on credit cards, while 44% said they feel like they have too much
debt.
Emergency savings gap
It’s no surprise that millennials also are struggling to
build emergency savings, a key measure of financial fragility.
Over a third (37%) in the NFCS data said they could not come
up with $2,000 to meet an emergency within a month, while over half (53%) said
they could not cover three months of expenses. Recent research from the Federal
Reserve also highlighted the severity of this problem, with many Americans
indicating they could not easily come up with even $400 for an unexpected
expense.
Lusardi expects the current crisis and level of layoffs to
exacerbate the challenges for Americans who lack savings and liquid assets,
especially since many younger Americans work in industries hard hit by the
crisis, including the service industry and tourism. One new study found close
to 40% of Americans overall can’t last a month on savings; 20% not even beyond
two weeks.
“It is no surprise we are letting people withdraw from
retirement accounts,” Lusardi said. “We’ve gotten so used to thinking people
don’t have savings and we don’t realize how important it is for the stability
of the economy and wellbeing of people. If you look at people who do well, it
is the older population, with a safe and secure income, people at the peak of
wealth accumulation.”
What can be done in the workplace
The millennial financial crisis is a combination of not
having better options and not knowing enough about finance. While the study
showed close to two-thirds convinced they had a high level of financial
knowledge, it also showed a high failure rate in answering three basic
financial literacy questions.
Lusardi said in every financial behavior documented in the
data there is evidence of millennials exhausting all their options, as well as
not knowing better ways to manage issues like debt, from credit cards to
student loan balances.
“Their financial literacy is staggeringly low,” she said.
While personal finance and economic education is occurring
at younger ages and in more states across the U.S., one of Lusardi’s chief
recommendations after reviewing the data is focused on the workplace. She
believes workplace education about finances will be key if we are to keep
millennials from falling even further behind.
“We need a wake-up call about young people just not being on
solid footing. Not having a solid financial foundation,” she said. “People
should have learned having watched the 2008 crisis, and should have done
better. ... This is the generation that will carry us forward and they need to
be on a much stronger financial footing, and we need to equip them better,”
Lusardi said.
Financial education programs tailored to the needs of young
workers could play a crucial role in supporting financial decision making and
helping them build financial resilience. Employers should consider implementing
financial wellness programs targeted to millennial employees, she concluded in
her analysis of the data and recommendations.
“Effective workplace financial wellness programs include
financial checkups, accessible and customized content, and cover a broad range
of personal finance topics. A financially strong and healthy workforce provides
the foundation for empowered and resilient communities,” Lusardi wrote.
Click
here for the original article.