Policy Responses to the Millennial Wealth Gap: Repairing the Balance Sheet and Creating New Pathways to Progress

Reid Cramer

Contrary to predictions of success made when the Millennial generation first coalesced, the facts and analysis presented throughout this book illustrate a new generational storyline. Millennials are in a fundamentally different economic place than previous generations. Relatively flat but volatile incomes, low savings and asset holdings, and higher consumer and student debt have weakened their finances. The Millennial balance sheet is in poor shape.

Not only are they failing to match previous patterns of young adults, but Millennials have seen their fortunes significantly lag behind older households in the years following the Great Recession. Compared to their generational predecessors, they are on a lower trajectory of building assets for the future. Along with their failure to match the experiences of their parents and grandparents, their sense of economic progress is beginning to fade. Even though Millennials are in their prime work years, their window of peak earnings will not remain open indefinitely. Their dilemma can be stated succinctly: Can Millennials repair their balance sheet, or are they destined to become a “lost generation” that fails to accumulate expected levels of wealth?

As Millennials age into adulthood, they will increasingly need more economic resources to thrive. Instead, they are experiencing a mismatch between the money they have and what it costs to meet their social responsibilities of work and family. This applies at the household level, and also generationally. Yet the Millennial wealth gap is wide—and consequential. It merits a policy response proportionate to the challenge.

The goal of this chapter is to build on the analysis of research presented throughout this book to advance a forward-looking policy agenda capable of responding to the unfolding reality of the Millennial wealth gap. Policy assumptions and considerations are shared and disclosed in the first section, followed by a sketch of specific policy responses capable of addressing generational inequity. Time is of the essence and, in fact, key to the policy response. Specifically, it is useful to distinguish between policy interventions to help current Millennials recover financially and those intended to create new and viable pathways of progress for future generations.

Policy Assumptions and Considerations

Designing a policy response to the Millennial wealth gap should be grounded in a set of assumptions. For starters, a strong economy with growing incomes that track productivity is an essential foundation for shared prosperity. But it is hardly sufficient on its own. We need inclusive growth, which includes jobs with good wages, accompanied by employee benefits and wealth-building opportunities. Each family and household must be able to assemble and deploy an array of economic resources—in the form of savings and assets—that can serve as both a cushion to provide security and a springboard to launch mobility.

While there are many different paths to take to build wealth in America, historically, several pillars of opportunity have played primary roles. These include the process of accessing education and training, securing a steady and well-paying job, receiving support from family networks, and increasing ownership of savings and assets. In recent decades, these pillars have weakened. For some, they were never there at all. For others, the Great Recession destabilized their previously secure foundations.

Wealth in America has never been evenly distributed, though levels of inequality have varied significantly. The skewed distribution of wealth today has reached historic proportions and public policy should address the imbalance. A collective goal should be to ensure that everyone is given opportunities to build wealth, especially those who start life with less.

As society attempts to grapple with the present and future of the Millennial generation, it must bring any social policy ambitions in line with the reality of their unprecedented diversity. This means giving special attention to the role of race and ethnicity, which are persistently associated with large and clear disparities. This holds true for a range of economic indicators, such as levels of savings and debt, participation in the financial mainstream, homeownership status, and lifetime earnings.

While the racial wealth gap is a long-standing feature of American society, there is evidence that it extends beyond a historic phenomenon. Although family wealth history and access to higher education explain some of the divide, there are new and recent developments that are exacerbating wealth disparities among racial and ethnic groups. For example, discrimination in the housing finance market has led to unequal outcomes. Relatedly, the mass incarceration of African American males has had severe financial impacts. Indeed, there is a large body of evidence that the African American community remains economically vulnerable, and preyed upon. Other groups have serious claims that their assets have been systematically stripped, such as Native communities, and new immigrants who were exposed to predatory financial practices.

The reality of a persistent racial wealth gap, created by both the historic legacy of slavery and discrimination as well as new sources of inequality, deserves a commensurate policy response. Fairness and equity should be important considerations, as well as social and economic justice. Undoubtedly, figuring out how to use race and ethnicity to inform future policy will be a challenging terrain for the country to navigate. While not a substitute for reckoning with the past, there are advantages to an approach of progressive universalism, where everybody is included and covered by a basic set of provisions, but those with fewer resources and greater needs receive higher benefits.

Moreover, to be effective, policies should align with the changing behaviors and preferences of young adults in America today. There remain significant headwinds making the path to savings and asset building more difficult. In particular, many younger Americans don’t trust financial institutions, nor are they confident that savings necessarily lead to wealth over the long term. The risks of wealth creation, to many of them, may exceed the rewards. While some risks associated with losing one’s income are shared, though Social Security, unemployment insurance, and welfare programs, the individual overwhelmingly assumes the risks of losing one’s wealth. Policymakers should address this imbalance.

The following description of policy responses reflects a broad and far-reaching agenda. That’s the nature of wealth. There are inter-related issues of age, race, and education. Not everything that is pertinent can be addressed here, including the importance of a quality early and K-12 education, a strong social safety net, a fiscally sound and generous Social Security program, consumer protections in the financial services marketplace, childcare, affordable and accessible health insurance, and wages in line with the cost of living. That’s a long list, but it still leaves room for identifying a set of strategy objectives in distinct policy areas that should garner more attention.

Even while focusing on the lack of wealth held by those in the middle and on the lower rungs of the economic ladder, there is an undeniable reality that the largest amounts of wealth are concentrated at the top. Policymakers may, then, want to consider the role that tax and redistribution policies may play in broadening capital ownership. When they do, they should acknowledge that the current cohort of older households is the wealthiest in U.S. and human history, while younger families are feeling financially squeezed, and increasingly unlikely to realize their parent’s version of the American Dream.

But the dream is not “fixed,” as generational scholar Neil Howe has observed; rather it is renewed and reimagined in every generation. When Howe helped coin the term “Millennial” to refer to the generation coming of age in the new century, his focus was on the behaviors and characteristics that made this cohort distinct from their parents (Howe and Strauss 2000). It is these attributes, along with lived experience, that will provide the impetus to revise and re-balance the terms of the prevailing social contract, which currently heavily favors older and wealthier Americans. Our collective challenge is to make a generational “adjustment” and re-orient existing policies so the rising generations are given the chance to achieve their own aspirations.

8 Policy Responses to Address the Millennial Wealth Gap

When thinking strategically about responding to the Millennial wealth gap, it is useful to distinguish between policies that can assist the current generation and those that can create more favorable conditions for future generations. Accordingly, a bifurcated policy agenda is presented, organized by strategic goals, that aims to help Millennials get back on track financially and create new pathways to wealth for the next generation of young adults.

Repairing the Millennial Balance Sheet

To improve the finances of the Millennial generation, policy reforms should address key components of the balance sheet: savings and assets as well as debts and liabilities. Policies should help people get started on a multi-tiered savings and asset-building continuum. This begins with small savings that can be immediately accessed, extends to larger pools of “intermediate” savings that can be used to acquire productive and durable assets, and simultaneously facilitates contributions to longer-term retirement plans.

Repairing the Millennial Balance Sheet

1. Promote Savings to Build Up Cash Reserves.

A broad range of research shows that liquid savings contributes to both economic stability and upward mobility. Without access to money to handle unexpected events, contingencies, and emergencies, people may be forced to depend on short-term loans with high interest rates, which can create a debt trap that is financially debilitating. Even small amounts can make a difference for financial health, mental health, and child outcomes. Cash reserves are especially important to Millennial workers, who are increasingly managing volatile incomes in the “gig” economy. Yet recent survey data reveal that 58% of American adults don’t have over $1,000 in a savings account and 32% don’t have any liquid savings (Huddleston 2019). Without accessible savings, people are particularly vulnerable economically.

A fundamental element for a wealth gap policy response should be the promotion of savings to build up cash reserves. Doing so depends on being able to access responsible financial services and supportive institutions. Yet the FDIC reports that over 25% of households don’t own a bank account or obtain financial products and services outside the banking system (FDIC 2017). Everyone should be able to easily open and operate a low-cost bank account. Several features are fundamental, including the ability to conduct everyday financial transactions, build up savings over time, and pay bills and transfer money electronically.

Beyond accounts, new incentives will be required to promote savings among people with lower incomes, especially in an environment of low interest rates. The following ideas can be designed and implemented to encourage and incentivize deposits:

• Remove the tax on interest from savings accounts, up to a set amount annually, such as for the first $500.
• Offer a savers bonus or match on deposits into a savings account, up to a set amount, annually, which can be facilitated through tax filing and direct deposit (Cramer 2010).
• Encourage the creation of new products to renew the promise of U.S. savings bonds. Previously, savings bonds were available to the small saver, offered protections on deposits, and had few reporting requirements. The savings bond should either be reinvented to bring it back to its roots, or a new retail product should be created as an alternative.

Additionally, there are a number of platforms and system processes that can be leveraged to support small savings. These include the tax filing system, mobile apps and online banking, employer payroll systems, and financial advice and coaching. Through each of these, there are opportunities to establish a set of default arrangements that channel people into savings. For instance, as an employee benefit, workers can be connected to an AutoSave system of flexible accounts and have deposits made automatically as payroll deductions (Cramer 2006).

2. Reduce the Debt Overhang.

Rather than wealth, Millennials are accumulating debt. The typical Millennial has higher debt relative to both their income and assets than any other generation at the same age. But their debt profile is distinct. Previously, starting families and forming households was associated with buying homes and taking out a mortgage. For Millennials, mortgage debt has been replaced by student loans and other forms of consumer debt, including car loans, credit card balances, and miscellaneous fees and fines. These types of debt cannot be leveraged and used to finance the purchase of other assets that can appreciate in value.

Student loan debt has increased from $500B in 2005 to over $1.5 trillion today. This rise reflects the reality of more people enrolled, but also rising tuitions, which have dramatically outpaced inflation. As a result, Millennials have taken out 300 percent more debt than their parents, but, unfortunately, it hasn’t always led to a degree. Among college graduates with a bachelor’s degree, student loans average almost $30,000, triple the figure for the same group in 1993, though median balances are about half that and manageable for most borrowers (Emmons, Kent, and Ricketts 2018). While there are advantages to investing in human capital development, student loans cannot be leveraged directly to boost wealth on the balance sheet.

There should be a large-scale policy response to address the student loan debt overhang, which may include a widespread cancelling of student loan debt. This approach is used in the financial markets, often after financial crises. Students should get the same consideration from their lenders, which in this case is the federal government, representing all of us. A more targeted approach would focus on those distressed borrowers most likely to default. There are tradeoffs between simplicity and targeting that may have to be assessed. Options, highlighted in other chapters of this book, include:

• Cancel student debt up to a certain amount per borrower.
• Sharpen efforts for income-based repayment.
• Fix the implementation of public service forgiveness plans.
• Employers should be encouraged and incentivized to offer student loan repayment as an employee benefit.
• End taxation of loan amounts that are forgiven.

Beyond student loans, there are other sources of debt that can be addressed through public policy, especially for debt that is in collections. Government fees and fines at all levels of government are a place to start. The San Francisco Treasurer has created an Office of Financial Justice, which has identified a number of approaches that should be pursued. Specifically, fines and fees should be based on an ability to pay; jail time should be prohibited for unpaid court debts, and state and municipalities should reduce their reliance on fees and fines for revenue.

3. Facilitate Deposits to Retirement Plans.

Longer-term demographic, fiscal, and wealth trends suggest that Millennials will experience unique and significant challenges in achieving retirement security. Given the scale of the potential wealth shortfall, policymakers should begin to consider measures to strengthen public safety net programs, such as Social Security, Medicare, Medicaid, and long-term care, and pursue additional efforts to ensure all Americans can increase their long-term retirement savings.

Although public policy has created a system of tax-advantaged retirement accounts like 401ks and IRAs, half of the workforce does not participate in these saving plans (Weller 2016). Even those that do may be under saving for their needs and in danger of failing to meet their own expectations. Public policy can do more to expand access to long-term saving plans and ensure everyone participates. Specific reforms include:

• Increasing the incentives to save in targeted retirement accounts by matching deposits into tax-advantaged accounts and savings plans.
• Requiring employers who offer plans to automatically enroll their workers and give them a choice to opt out.
• Ensuring that people who don’t work for employers administering retirement plans have equal access to a public option retirement savings plan.

Federal proposals have called for creating a Universal 401K program (Calabrese 2007). Even without federal action, states have moved to create these systems. California and Illinois are calling their systems “Secure Choice” and other states are pursuing similar plans. In both a public and private system, it is essential for policy to establish a set of default arrangements that get people on a reasonable course for retirement savings given their age and income. These include provisions to automatically escalate contributions as an individual’s income rises.

4. Increase the Supply of Affordable Rental Housing While Promoting Paths to Sustainable Homeownership.

In many parts of the country, affordable housing and homeownership are both out of the reach of Millennials. The homeownership rate for the under-35 households fell from 43 percent in 2005 to a historic low of 31 percent in 2015 (Joint Center of Housing Studies 2016). Young adults today are half as likely to own a home as they were in 1975. But rents are up. The number of households spending over half their income on rent has grown by more than 50 percent over the last 15 years (The Pew Charitable Trusts 2014). The lack of affordable housing greatly impacts the household balance sheet because it takes up a greater share of income, leaving little left over to cover other living expenses or save in cash reserves.

Not only is housing among the highest household expenses, but it is closely tied to long-term wealth outcomes. In fact, it is uncommon for renters to accumulate even average amounts of wealth. The latest figures from the Federal Reserve show that the typical renter had a net worth of $5,200, while the typical homeowner had a net worth of $231,400. This makes housing tenure among the most significant variable explaining long-term wealth outcomes. The wealth disparities among renters and homeowners should prompt policymakers to pursue measures to increase the supply of affordable rental housing while promoting sustainable homeownership for those ready to buy.

For renters, policy should be used to:

• Increase subsidies to multifamily, nonprofit housing providers to increase the supply of affordable rental housing;
• Expand federal rental housing assistance and increase the supply of housing vouchers to enable people to afford units in the private market; and
• Promote alternative housing arrangements that move beyond a simple rent-own binary, such as shared-equity housing, cooperatives, and options other than private, single-family homes.

Even with these initiatives, homeownership will remain a central means of building wealth. This is because it offers an opportunity to build equity from paying down a mortgage as well as a vehicle that can be leveraged to strategically raise other assets. In some, but not all markets, prices appreciate too. Recent declines in homeownership and household formation are a significant source of potential wealth loss. Accordingly, policies to support responsible homeownership should be pursued and include:

• Oversight of mortgage market to ensure the provision of appropriate products with reasonable terms, fair borrower risk assessments, and good income underwriting;
• Increasing access to home buying information and related financial knowledge, especially targeted to historically discriminated groups; and
• Incentives and support systems to help people to save for down payments.

Although many people prefer homeownership because it is associated with having roots in a community, it also involves real risks and must be approached with caution. Conceptually, homeownership should be treated as a “capstone” financial event, not a starting one. In the future, building a diversified balance sheet—with low levels of consumer debt and high levels of liquid savings—should precede and help sustain responsible homeownership.

New Pathways to Progress for the Next Generation

Creating new pathways to economic success for the next generation will undoubtedly be paved with investments in education. To promote generational equity and tilt the social contract to those earlier in life, policymakers should significantly expand investments in early, primary, and secondary education. Not only will this promote the development of human capital and enable social engagement, it will also serve as a foundation for future wealth.

Beyond education, policymakers can initiate several reform efforts to help the rising generations. Specifically, they can invest in their asset development; ensure that post-secondary college and training is accessible and affordable; create new, longer-term wealth-building opportunities; and support people as they strive to balance their family caregiving and work responsibilities.

New Pathways to Progress for the Next Generation

5. Invest in the Next Generation’s Asset Development

Young people need to accumulate resources they can tap strategically to take advantage of key opportunities over a life’s course. Public policy can assist by creating a public savings infrastructure to invest in the next generation’s asset development.

This infrastructure will be most effective if it includes everyone, is created as early in life as possible, features incentives to contribute, and remains with that person throughout life. For instance, beginning when children are born, they can be connected to a savings plan system and receive an initial seed deposit, ideally with a higher amount for those from lower-wealth families. The accounts can receive contributions from a variety of sources, such as family, employers, or government, so the accounts can grow over time. Accumulated resources can subsequently be leveraged for many social purposes, including post-secondary education, home purchase, business capitalization, and retirement security.

While a universal system of children’s savings accounts can provide a widely accessible and life-long foundation for savings and asset development, there are a number of different models that are being tested at various levels of government (Butrica 2015). Early account-based savings and asset development programs include:

• State-based 529 college savings plans, with progressive matching features. These existing tax-advantaged accounts offer a means to save for post-secondary education and training, but are largely used by wealthier families. A number of states have augmented their programs by providing an initial investment to anyone who opens an account and targeted matches for families with lower incomes (Boshara et al., 2009).
• Municipalities have begun to experiment with providing college savings accounts to their primary school students, including efforts in California led by Oakland Promise and San Francisco’s Kindergarten to College.
• Proposals at the federal level to create an account-based system that includes every child and targeted incentives to facilitate deposits have received bipartisan support in the past and continue to attract attention (Wallace-Wells 2018).

6. Address the Rising Cost of College and Reduce Reliance on Student Loans.

As the share of manufacturing and industrial jobs declined in the later half of the 20th century, the relationship between education and income changed. Those with college degrees saw their incomes rise relative to those with only high school diplomas. Concurrently, the educational landscape has dramatically changed. Today there are more institutions, more degree programs offered, much higher tuitions, and greater availability of student loans. Two trends have diminished the wealth returns, or “premiums,” on investments in college: rising costs and increased reliance on student loans.

Policy reforms should focus on ensuring that higher education is accessible, affordable, and not a financially risky proposition. A broad agenda should be pursued that includes the following components:

• Increase tuition subsidies available for lower-income students. The Pell grant has a track record of success but the amounts available have not kept pace with costs. The maximum grant level should be increased and rise with inflation. Eligibility criteria should also be expanded so more students can avoid relying on loans to attend college.
• Require greater transparency by educational institutions. Schools need to disclose and report on student outcomes that reflect on the quality of the educational experience they are offering. Disclosures should include the debt levels and income earnings of graduates.
• Ensure colleges and universities prevent excessive student debt. Along with rising tuition, there are underperforming institutions, which are relying on students assuming debt but not assuming accountability for their subsequent economic outcomes. Colleges should have some accountability or financial stake in a student’s economic success. Their nonprofit status should be contingent on minimizing unmanageable student debt loads relative to future earnings.
• Regulate for-profit educational institutions that rely on federal student loans. These underperforming institutions often look more like scams. The federal government can deny federal assistance to institutions with a history of poor student outcomes.
• Support more cost-effective alternatives to four-year degree programs, including community college, apprenticeships, and other meaningful certificate programs. The role of employers in providing training for their employees is largely overlooked. Employers should be expected to assume some of the responsibilities for the training that can power the workforce.

7. Promote New Sources and Opportunities to Grow Incomes and Build Wealth.

A rapidly growing number of workers can no longer command enough earned income to build sufficient savings and wealth. When this historic link between work and wealth is broken, policymakers and others must consider new ways to generate income and ownership from private, corporate, and public assets. There should be widely available alternatives to the leveraging potential of homeownership. As a matter of equity, those that don’t own homes should still have opportunities to build wealth; and homeowners need protection from the risk of drawing down their housing equity. The issue is what new “things” can be leveraged.

Here is a list of novel ideas policymakers should consider:

• Having an ownership stake in “common” assets, such as the air we breathe or the electromagnetic spectrum we rely upon for phone, internet, TV and public safety. For example, the state of Alaska has established a permanent fund managed by a state-owned corporation that pays out a dividend each year to its residents based on revenue raised in part by leasing public lands.
• Development of a “data dividend,” where individuals are paid for sharing their personal data. Since private firms are increasingly generating value from personal data, there are opportunities to charge a fee for fair use that could be collected and distributed through a public system.
• Encouragement for more widespread adoption of employee stock ownership and profit-sharing plans. While these ownership structures have a long track record, they might be energized by the recent benefit corporation (B Corps) movement, which adds social benefit objectives to traditional goals of profit maximization and shareholder value.

While each of these ideas has precedents that can be studied and assessed, more work is required to develop these ideas before implementation. Still, if implemented at scale, they reflect the promise of generating new wealth that can be widely shared.

8. Support Family Caregiving.

As economic pressure on households increase, it becomes harder to meet familial responsibilities to care for young children and other family members. Reducing the financial stress and burden of caregiving can support the formation of independent households and decisions to have children. The goal should be to support families with policies that get more money into households during the times when it is harder to work given other responsibilities. Three specific ideas that can accomplish this have recently received increased attention.

The first proposal is to offer paid family leave. While this benefit has gained traction in the private sector, it is usually limited to caring for newborns. It should be expanded upon to cover caring for spouses, siblings, and aging parents and grandparents. In the last three years, several states and the District of Columbia have adopted a paid leave program, while other jurisdictions have expanded the federal unpaid leave law. This is not enough. Federal policy must support a meaningful and widely available paid leave program.

The second policy idea is to build on the current system of delivering income support to working families with children and low incomes. The existing Earned Income Tax Credit does this already and it can be expanded in terms of its size and scope, especially for families with children. Several states and municipalities are already offering a tax credit to augment the federal policy.

The third idea is to create a universal family care system, funded through a single social insurance fund (Poo and Veghte 2019). Recognizing the need for a social safety net that responds to the complex realities of people’s lives, it would begin with early childcare and education, include paid family leave and medical leave, and offer long-term services and supports for the elderly. To help people with their caregiving responsibilities, there needs to be a mechanism to get money into the system over time. The social insurance framework would hinge on a universal structure where workers and employers contribute to a program across the life course so that people can draw upon it in times of need. It is an ambitious approach to address one of the most glaring gaps in our current social policy system.

References

Boshara, Ray, Margaret Clancy, David Newville, and Michael Sherraden. “The Basics of Progressive 529s.” St. Louis, MO: Washington University, Center for Social Development, and New America Foundation. 2009.

Butrica, Barbara. “A Review of Children’s Savings Accounts.” Urban Institute. 2015.

Calabrese, Michael. “A Universal 401(k) Plan.” Washington, DC: New America Foundation. 2007.

Cramer, Reid. “AutoSave: A Proposal to Reverse America’s Savings Decline and Make Savings Accounts Flexible and Inclusive.” New America. 2006.

Cramer, Reid. “The Saver’s Bonus: A Policy Proposal.” New America. 2010.

Emmons, William R, Ana H. Kent, and Lowell R. Ricketts. “The Demographics of Wealth: How Education, Race and Birth Year Shape Financial Outcomes.” Center for Household Financial Stability, Federal Reserve Bank of St. Louis. 2018.

FDIC. National Survey of Unbanked and Underbanked Households. 2017.

Howe, Neil and William Strauss. Millennials Rising: The Next Great Generation. New York: Vintage Publishers. 2000.

Huddleston, Cameron. “ 58% of Americans have Less than $1,000 in Savings.” GoBankRates.com. May 24, 2019.

Joint Center on Housing. “Demographic Change and the Remodeling Outlook.” 2016.

Pew Charitable Trusts. “American Families Face a Growing Rent Burden.” 2018.

Poo, Ai-jen and Benjamin Veghte. “The Big, Feminist Policy Idea America’s Families Have Been Waiting For: How Universal Family Care could help people throughout their lives.” New York Times. June 23, 2019.

Wallace-Wells, Benjamin. “Baby Bonds Proposal Could Transform the Reparations Debate. The New Yorker. December 6, 2018.

Weller, Christian. Retirement on the Rocks: Why Americans Can’t Get Ahead and How New Savings Policies Can Help, NY: Palgrave MacMillan. 2016.