Home » Swint Friday's Articles » Younger Generation Faces a Savings Deficit

Younger Generation Faces a Savings Deficit

Postrecession Thrifty Ways Fade Amid Weak Jobs Market, Hefty Student Debt


After a flirtation with thrift after the recession, young Americans have stopped saving.

Adults under age 35—the so-called millennial generation—currently have a savings rate of negative 2%, meaning they are burning through their assets or going into debt, according to Moody’s Analytics. That compares with a positive savings rate of about 3% for those age 35 to 44, 6% for those 45 to 54, and 13% for those 55 and older.

The turnabout in savings tendencies shows how the personal finances of millennials have become increasingly precarious despite five years of economic growth and sustained job creation. A lack of savings increases the vulnerability of young workers in the postrecession economy, leaving many without a financial cushion for unexpected expenses, raising the difficulty of job transitions and leaving them further away from goals like eventual homeownership—let alone retirement.

“In the very near term it’s a plus for spending and economic growth, but in the long run these households are not saving, and that will impair their ability to spend in the future,” said Mark Zandi, the chief economist of Moody’s Analytics who calculated the numbers with Moody’s economist Mustafa Akcay.

Emily Turner, 26, has had difficulty accruing savings while she pays off her student and credit-card debts.ENLARGE
Emily Turner, 26, has had difficulty accruing savings while she pays off her student and credit-card debts. MELISSA GOLDEN FOR THE WALL STREET JOURNAL

To be sure, Americans’ savings is still growing in the aggregate. The Commerce Department’s main figures on savings show a nationwide increase in saving since the recession as baby boomers and other older Americans have maintained the cautious savings habits developed during the recession.

But the new Moody’s data—using a technique developed at the Federal Reserve to combine its Survey of Consumer Finances and Financial Accounts of the United States reports—show how savings rates diverge across demographic groups.

“I’ve been saving almost exclusively in my mind,” said 26-year-old Emily Turner, a 2010 graduate of Villanova University who lives in southern Maryland. Most of her paycheck from the digital consulting and web-design firm she works for “doesn’t even make it to a conventional bank account. I’ve certainly not had the opportunity to invest in stocks or anything.”

The money mostly went to her social life and travel, she says: 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.

There was a sign it wouldn’t be this way. After the recession, the savings rates of those under age 35 climbed to 5.2% in 2009 and even briefly surpassed the savings of those age 35 to 44, according to Moody’s.

The problems from a lack of savings promise to reverberate for years. Those who don’t save are unlikely to be wealthy in the future, meaning American angst over wealth inequality seems poised to persist if most millennials are unable to save or choose not to.

Young households’ wealth has declined even more than their incomes. In the previous generation, Americans who were under 35 in 1995—often labeled Generation X—earned wages that were 9% higher than today after adjusting for inflation. Now, the median millennial has a net worth of $10,400, down 42% from $18,200 for Generation X, according to Fed data.

The Fed’s data also show young Americans are less likely to own a variety of investments and investment accounts than their counterparts in Generation X were at this age, including certificates of deposit, savings bonds, stocks, retirement accounts and other managed assets. The only savings vehicles young people today use more than Generation X did at the same age are transaction accounts.

“They are truly a vulnerable group,” said Annamaria Lusardi, an economist at George Washington University who studies the implications of financially fragile young households. “They don’t have assets to buffer themselves against shocks, and they also have to manage debt.”

Some, however, have the means to save and invest, but opt not to. Curtis Holland, a 30-year-old software developer in Arlington, Va., has held stable jobs since graduating in 2007, and—unlike the majority of millennials—has a retirement account. But he has avoided other types of investments as “too complicated.”

“I don’t know the risks,” he said. “I don’t know the benefits.”

For some young households, the inability to save reflects the weak job market, said Shai Akabas, an economist at the Bipartisan Policy Center. While unemployment nationally has fallen below 6%, workers age 25 to 34 have a 6.2% unemployment rate and those 20 to 24 face 10.5% unemployment.

“There’s people who really can’t save because they don’t have the means to save and that’s not a small group of people,” Mr. Akabas said. “If you’re in a $25,000-a-year job and starting a family, it’s going to be very hard to accumulate savings regardless of your consumption decisions.”

Another big difference from earlier generations is the rise of student loans. In 1995, borrowers under 35 had median student debt of $6,100, according to Fed data. That has risen to $17,200.

For Ms. Turner, debts include $5,000 in student loans, $3,000 on credit cards and $6,000 borrowed from family. “There’s no formal note for that, but it resides in my psyche that I will pay it back at some point,” she said.

“I know I shouldn’t have accepted credit so freely,” she said. “But part of youth, the wiring of a young person, is the focus on really short-term gratification.”

Write to Josh Zumbrun at Josh.zumbrun@wsj.com