The Emerging Millennial Wealth Gap: Opening Note

Reid Cramer

A popular story line took hold only a few years ago, depicting Millennials in America as an ascendant generation. Their parents were attentive, the technology was dazzling, and they grew up optimistic about the future. Along the way some of their elders felt they were coddled and prone to an inflated sense of entitlement and privilege. Yet less encumbered by tradition, they were open to cooperation and more tolerant of differences among their peers. They were poised to seize the day and remake society in their image.

As they have entered adulthood, this narrative picture has crumbled. The generalizations foisted upon them didn’t quite capture the actual diversity and complexity of their experiences. If there is an overarching force coalescing this generational cohort, it is more likely to be their shared sense of economic insecurity, born from coming of age in the wake of the Great Recession.

Even as memories of the recession recede, disruptive ripples launched by the financial crisis continue to upset the economic lives of this rising generation. Although they bore no responsibility for creating the economy, or failing to regulate it effectively, young adults have had to live with the consequences. Just as Millennials approach their prime work and family-forming years, poor finances are complicating how they assemble the building blocks of success. Stagnant incomes, rising debts, and a broadly weakened financial profile have contributed to creating a new story line: Millennials appear unlikely to replicate the economic success of their parents and grandparents. Central to this unfolding era of uncertainty is their relative failure to begin the process of accumulating wealth and assets.

By many measures, America remains a prosperous country—among the richest in the world—and many individuals are thriving financially. While the distribution of wealth has never been equitable—the country was founded with the enslavement of Africans on land previously inhabited by native peoples—there has been a sense of generational progress. A growing middle class and expanding civil rights fostered a widely held belief that prosperity might increasingly be shared. The recent performance of the economy has undermined this expectation. Instead, more Americans recognize that there has been an increasing concentration of resources among those at the top of the economic ladder. As concern about inequality has grown, wealth inequities have been widely acknowledged. Yet less attention has been given to the emergence of a new and generational dimension to wealth inequality. Simply stated, the Millennial generation has less wealth and a poor generational balance sheet. While the income of a typical Millennial is only slightly below levels predicted by the experience of past generations, young adults in America today are on a much lower trajectory in their wealth accumulation than their predecessors. Dramatically so.

One insightful distillation of the Millennial wealth gap and the relative failure of young adults to begin their lifelong wealth building process has been described by scholars with the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. Using the most comprehensive data of household wealth to compare the net worth of young adults over time, they found that the typical Millennial today holds 41 percent less wealth than a similarly aged adult in 1989. Whether or not this cohort gets back on track or misses out on the experience of wealth building altogether will have long-term impacts and broad ramifications.

A closer look at the data shows how the Great Recession essentially has catalyzed the Millennial wealth gap. While the initial destruction of wealth was widespread, the recovery experience has been uneven generationally. Two particular trends stand out when summarizing the experience of age cohorts in the economy since 2008. First, older households have rebuilt their balance sheets and grown their wealth holdings, while young adults have lagged behind. Second, wealth gains made by Black and Hispanic families over the preceding decades were largely wiped out and have been slow to recover, which has amplified historic inequities and created new sources of inequality. As a result, the overall racial wealth gap has not narrowed over the last 30 years. The gap remains a chasm.

Given the increasing diversity of the Millennial generation—one of its most salient characteristics—the racial wealth gap is clearly exacerbating the Millennial wealth gap. The most recent wealth data from the Federal Reserve shows that the average wealth holdings of the typical Black Millennial are approximately $5,700, compared to $26,100 for White Millennials, while the typical Hispanic Millennial had a net worth of $14,690. And while there are disparities in the distribution of both income and wealth according to race and ethnicity, the wealth gap is wider. Among Black and White Millennials, wealth inequality was 2.6 times greater than income inequality, according to the most recent data; among Hispanic and White Millennials it was 1.5 times greater. These findings should motivate increased scrutiny on the role of race and ethnicity in the emerging Millennial wealth gap, and focus attention on solutions to address it.

Unfortunately, there is a growing disconnect between the economic conditions the diverse generation of Millennials face and their government’s response. This misalignment between public policy and lived experience threatens to undermine the potential of an entire generation, and handicap the next. This is because Millennials are not just the future—they are already powering our workforce, steering our economy, and poised to exert their influence as the largest generation. Perhaps most significantly, they are the ones deciding if, when, and how to start families, and will be assuming responsibility for raising the country’s most prized resource: the children of the next generation. We all have a stake in their welfare.

Guiding Insights

Despite its dramatic emergence and real world consequences, the Millennial wealth gap has received scant attention to date. This publication is an attempt to address that. By examining the data, identifying trends, and exploring the underlying dynamics of the generational distribution of wealth in America today, the authors included in this volume have committed to participating in a constructive policy discourse. Collectively, we seek to promote policy reforms capable of responding to current conditions and expanding access to viable pathways to progress. In this opening note, a few of the primary ideas, assumptions, and aspirations that have guided this inquiry will be clarified.

Wealth is a Foundation for Economic Security

In the pantheon of economic variables, income is revered. It attracts attention because it represents the flow of resources into a household and correlates closely with consumption of other resources, such as food and housing. It’s also easier to count. But besides the flow of money, having a stock of economic resources matters a great deal for a household’s welfare. Access to wealth—in the form of savings, assets, and even access to credit—is one of the most impactful variables determining long-term social and economic outcomes.

Wealth takes many forms. Tangible and intangible. Real and unrealized. Values change over time and can fluctuate arbitrarily. Yet savings and assets also can accrue over time, as can debt and liabilities. Studies of household wealth often use net worth as a proxy because it is the amount left over after liabilities are subtracted from the market value of assets. While wealth and net worth are harder to track than income, and are subject to external market forces, the overall condition of one’s balance sheet can create opportunities or obstacles, impacting a person’s life and work choices.

Wealth is a key to financial security and economic mobility for a number of reasons. It has an insurance function that can be activated to smooth over unexpected income fluctuations, respond to emergencies, and avoid debt. Wealth also has an investment function: it can be strategically deployed in ways that trigger future benefits, such as paying for tuition, making a down payment on a home, capitalizing a small business enterprise, or buying into other enterprises that can become more productive and increase in value. Although wealth connotes luxury, it is shorthand for things of value, and is most relevant to those who have less.

Income can be a source of wealth in the sense that income not immediately consumed becomes part of the stock of resources that can be available for later use. It is this extended time horizon which makes wealth unique, and confers it special properties. Research pursued in the last 20 years has identified a number of significant “asset effects” that can accrue to the holders of wealth.¹ Research confirms that even small amounts available at key moments can make a difference, and can be especially valuable to those with low incomes living in poverty.² One of the most significant asset effects is how owning financial assets can trigger a sense of economic security and promote mental health that facilitates the ability to plan for the future. Conversely, those with low or no access to wealth are by definition financially insecure, limited in many ways from participating in the economy and reaching their full potential.

The study of wealth and economic security opens up a window to consider what impacts the generational balance sheet. Changes in net worth can be linked to business cycles of the economy, behavioral trends at the household level, and the revision of public policies, such as levels of taxation and subsidies. Beyond individual households, aggregate net worth trends can identify patterns of wealth holding among groups of people, revealing degrees of equity. This applies to racial and ethnic groups, regions of the country, and even generations. There should be widespread special concerns if large groups of people or communities are unable to access wealth or begin an extended asset building process.

Wealth Building Public Policies Should Match the Life Cycle

By its nature, wealth building is a long-term process. In fact, many benefits compound over time and are often realized at a much later date than when initially acquired. For many families, there is a distinct life cycle pattern to wealth holding in America, and we should aim to match public policies to promote wealth building with distinct stages of the life course.

Most young adults start out with negligible savings. As they begin to form households and grow their earnings during their 30s, their assets start to modestly grow, before accelerating into the 50s in preparation for retirement in the late 60s. This is what’s typical. Median wealth figures describe those precisely in the middle, with half having more and half having less. There are many who don’t own anything and never will accumulate much wealth. Still, these patterns of generational wealth building, and changes since the Great Recession, offer clues to the moments in the life course that are associated with greater potential for wealth accumulation.

This approach creates a window to think more generationally. Evidence abounds that contemporary finances have altered life choices and shifted previously prevalent milestones of adulthood. For instance, fewer young people today are getting married, forming households, buying homes, and having children. Some of these socioeconomic trends may have begun before the financial downturn took hold, while others have been intensified by it.

Especially for young adults, there are key moments in the life course that have long-term impacts on economic outcomes. These include moments such as the birth of a child, pursuing an education, entering the workforce, forming a household, starting a family, and even the end of life. Public policy can be designed to take advantage of these moments. There is a special role for public policy to support young families at the time when they are raising children. Unfortunately, this is precisely when the feeling of financial stress is greatest. Similarly, the prime work years are economically formative, and exert a strong influence on longer-term trajectories.

Generational Fairness is Part of the Social Contract

Just as with families, our society is bound together by mutual obligations among the generations that form the basis of an implicit intergenerational contract. Different generations support each other depending upon where they are in the life course. Children depend on their parents, the elderly are assisted to age with dignity, and there is an expectation that each generation can do better than the last.

The emergence of the Millennial wealth gap presents a particularly acute challenge to the concept of “generational fairness.” With persistently poor finances, Millennials are having difficulty assuming their responsibilities. If the young adults raising families and powering the workforce feel they are shouldering more burdens than they can handle financially, basic assumptions about social responsibility may be upended. There is a collective interest in ensuring that sufficient generational assets are available to Millennials to meet their obligations.

Previously, conceptions of the intergenerational contract informed what government could and should be able to do. Societal assumptions are actually codified in public policy. At times people contribute by paying taxes, and at other times they receive benefits based upon their place in the life course. There are expectations that our government will provide support for us when we need help the most. Often these benefits have been delivered as incentives to employers to pass along to their workforce. Yet over the last 30 years, there have been a series of policy shifts—in areas such as health care and retirement—that have transferred the responsibility for managing economic risks from employers and government to individual households. Increasingly, families are expected to build up resources to meet their individualized responsibilities. This risk shift has raised the stakes for wealth building, both for individual households and among generations.

A comparative cohort analysis of wealth trends reveals clear tensions, both economic and cultural, which have the potential to trigger a larger political reckoning that will play out in policy debates. The Millennial wealth gap may increasingly become the context for calls to cut benefits for the elderly or address the level of debt passed on to the next generation. Despite inherent tensions, a more constructive approach is to design policies that address concerns of both the young and the old. In doing so, a number of choices will have to be made to address equity imbalances, distinguishing among different types of households and incentivizing certain types of behaviors. Given current trends and our national history, issues of race and ethnicity should be broadly assessed. If fairness and equity receive proper attention, social and economic justice will be included in the discussion, creating an opportunity to consider reparations. Policy choices can and should be made that will impact the distribution of resources, implemented with changes in taxation and subsidies. The goal should be to rebuild and rebalance the intergenerational contract by taking account of generational fairness and reciprocity, as well as fairness in the distribution of wealth and power.

Policy Should Align with Millennial Attitudes and Preferences

In designing policies that are capable of responding to mounting generational challenges, it matters how those affected think about current affairs and participate in the political process. In the years ahead, Millennials will lead shifts in public opinion, creating opportunities for large-scale policy change. This creates an imperative to develop policies that can respond to contemporary conditions and align with the prevailing attitudes and behaviors of the rising generations.

With preferences that diverge from those of older Americans, Millennials have already had an impact on a number of social-issue policy debates—such as marijuana legalization, gun control, and gay rights. However, as a cohort, Millennials remain skeptical of political parties; 44 percent identified as political independents in 2017, far exceeding GenX-ers (39 percent) and Baby Boomers (32 percent).³ Although Millennials are not monolithic in their political beliefs, as a group they tilt toward the liberal side of the political spectrum. When “lean” is considered in survey answers, more Millennials associate themselves with the Democratic Party (59 percent) than the Republican Party (32 percent); the 27 percent spread exceeds those for GenX (6 percent) and Boomers (2 percent).⁴ Yet only 49 percent of Americans ages 18 to 35 voted in the last presidential election, compared to about 70 percent of Boomers.⁵

In crafting a policy response to the Millennial wealth gap, it will be necessary to consider the contemporary political dynamics which are shaping the policy discourse and influencing the extent of their future political participation. There’s little doubt that the current political moment presents major challenges in crafting a Millennial public policy agenda. Chief among these is the prevailing political polarization that has weakened the norms of governance and poses significant obstacles to policy reform efforts. Still, there is value in the task of identifying durable policy solutions that respond to current conditions and can be effective when implemented at scale.

This will be particularly relevant during the unfolding presidential campaign of 2020, which will drive discourse and set the course for future policy changes. The extended campaign season will create an opportunity for new ideas to emerge that might gain momentum. Accordingly, it is a time to incubate large-scale policy interventions and a broad agenda to address the issues faced by the current generation of Millennials as well as those who will come next. Absent a concerted policy response, the troubling disparities in wealth and opportunity may persist for years to come.

Guide to the Volume

Exploring the connections between wealth and financial health, the first section of this book uses a generational perspective to clarify how large cohorts of Americans are indeed on different trajectories, reflected in their financial profiles. My opening chapter seeks to frame the inquiry by establishing a set of reference points for a generational analysis and describing some of the prevailing demographic realities shaping the Millennial generation, including the extent of their relative diversity and how their group experience is diverging from those of their predecessors.

The two chapters that follow offer insight into the most prevalent wealth trends as they are playing out generationally. William Emmons, Ana Kent, and Lowell Ricketts of the Center for Household Financial Stability at the St. Louis Federal Reserve Bank present an innovative analysis of age and net worth. Working with the most comprehensive wealth data supplied by the Fed’s Survey of Consumer Finances, they are able to compare the amount of wealth we expect a typical young adult to have accumulated, given past performance of the economy, against what that typical young adult actually owns. The results are striking. Not only are Millennials behind previous cohorts, but they demonstrate how older households are faring particularly better. This move of equity up the generational ladder represents a profound shift in the distribution of wealth, raising a number of policy questions.

Another striking trend is the erosion of wealth held by families of color and the persistence of the racial wealth gap that many had expected to close in the post–civil rights era. Instead, this gap endures. Fenaba Addo and Yiling Zhang, scholars at the University of Michigan, innovatively describe several vital manifestations of the racial wealth gap, with a focus on young adults. Recognizing that racial wealth inequities have been a central feature of American history, they show how they have been reproduced and actually extended among Millennials in recent years. Their findings are sobering and should motivate a deeper consideration of ways policy might respond. They offer additional insights into key drivers of these outcomes, specifically through pathways that include relative access to higher education, degree completion, and marriage to others with education and economic resources.

In order to assess how young people are experiencing the economy, it helps to ask them. Vladimir Enrique Medenica, Matthew Fowler, and Cathy Cohen present an analysis of Millennial public opinion as collected by the GenForward Survey at the University of Chicago , a nationally representative survey of young adults that pays special attention to how race and ethnicity shape people’s attitudes and experiences. Specifically, they report on how young people feel about work and the economy. Their analysis elevates how distinct racial and ethnic groups experience changes in the economy differently. The variations they uncover in perceptions, attitudes, and behaviors can and should be used to inform policy interventions.

This section concludes with an article by Thea Garon summarizing evidence from the U.S. Financial Health Pulse, an innovative project of the Financial Health Network designed to track the totality of people’s financial lives by considering how they spend, save, borrow, and plan. Among the innovations of this project is a metric of financial health that can distinguish people who are financially vulnerable, coping, or healthy, depending upon their behaviors. When applied to Millennials, this metric indicates that only a quarter of the population can be considered financially healthy, and deeper analysis reveals wide gaps among racial and ethnic groups. This work reflects how widespread financial security is among this generation, with the overwhelming majority living as poor, near poor, or one calamity away from financial hardship.

The book’s second section examines key components of the Millennial balance sheet in greater detail, which features changing relative shares of assets and liabilities. Signe-Mary McKernan and Caroline Ratcliffe of the Urban Institute, and Trina Shanks of the University of Michigan, use an innovative approach to assess the current financial position of the Millennial generation. They look at both wealth data and collateral evidence provided by private-sector credit agencies that track consumers’ borrowing and payment behaviors. The credit scores assigned to borrowers are a proxy for financial health, and also subsequently determine the cost of accessing future credit. Extending their analysis of wealth and credit health among Millennials to geography, they reveal how financial hardship is also regionally concentrated, an insight that has important policy ramifications.

The next set of chapters examines the liability side of the generational balance sheet. Rather than building wealth, many Millennials have accumulated debt, but the nature of this debt has changed. Instead of mortgage debt, which previous generations have historically begun to accrue by the time they reach their early thirties, Millennials have accumulated rising levels of consumer and student loan debt.

The current state of federal student loan portfolio reveals a staggering $1.5 trillion in outstanding debt. In his analysis of the federal student loan system, Wesley Whistle from New America’s Education Policy Program is able to describe trends in student debt and distinguish among different types of borrowers. Looking at debt levels, defaults, and loans in collection, he describes the relatively poor outcomes by those that don’t finish their degrees, have excessive repayment burdens given their subsequent income, attended a for-profit school, and African Americans generally. Along with his analysis of the data, he presents a series of policy reform ideas targeted to borrower characteristics that can reduce extended financial hardship, if implemented at scale.

Beyond student loans, other consumer debt among young adults has increased too. Ida Rademacher and Genevieve Melford of the Aspen Institute’s Financial Security Program assess this growth and argue that debt has reached such unsustainable levels that it is sowing the seeds for the next financial crisis. They highlight work in the field that is beginning to identify innovative solutions to address consumer debt, specifically with reforms in the management of student loans, the reduction of government fines, and the regulation of collection agencies.

The section concludes with a closer look at the changing relationship of Millennials to housing. Analysis by Jung Choi of the Urban Institute’s Housing Finance Policy Center shows that not only do Millennials have a lower rate of homeownership as traditionally measured, but they have lower rates of household formation generally. The increasing prevalence of living with parents or relatives is a logical response to income and debt constraints, but it can undermine wealth building prospects. By considering both the lower homeownership rate and the lower household formation rate, Choi is able to provide a more realistic estimate of the potential wealth loss experienced by Millennials. In this sense, changing patterns of living arrangements, which have led to declines in homeownership, are actually among the most significant new sources of wealth inequality that have taken hold since the Great Recession.

The final section features articles that explore the policy implication of the emerging Millennial wealth gap. Liz Hipple of the Washington Center for Equitable Growth reviews the accumulating social science research that attests to the relationship between a family’s economic resources and a child’s subsequent outcomes, and identifies a key measure of intergenerational mobility. She argues that this should be the foundation for a policy response. Further, she makes the case for going beyond solutions that merely equalize access to activities that support human capital development, such as education and skills attainment, to solutions which ensure that young adults can benefit from deploying their potential in the economy. In doing so, she focuses on the need for higher wages and coherent career ladders, as well as the need to address discrimination experienced by people of color, which she shows to be a persistent feature of American society and its economy.

This approach is particularly relevant given the dramatic rise in student loan debt and its role in undermining future wealth building and economic security. Ben Miller, Colleen Campbell, Brent Cohen, and Charlotte Hancock of the Center for American Progress and Generation Progress present four specific policy options to address the $1.5 trillion of outstanding federal student loan debt. To facilitate a comparative assessment, they articulate a set of criteria with which to assess the merits of a policy response. Their options vary in scale and take into account different borrower characteristics. For instance, many young adults carry student loan debt even though they did not complete a degree. This group has a relatively high rate of default, which makes them particularly vulnerable financially. Those who completed a degree, especially at the graduate level, are less likely to default, but may still face struggles related to repayment. These are the nuances that should inform a policy response to one of the most pervasive problems afflicting the Millennial generation.

Finally, I seek to advance a forward-looking policy agenda to respond to the unfolding reality of the Millennial wealth gap. The last chapter presents a set of specific policy responses that can be pursued at scale to reduce generational inequities. These responses are intended to address the dual imperatives of helping the current generation repair their balance sheets and simultaneously creating new pathways to progress for future generations.

Without a dramatic change in the fortunes of Millennials, an entire generation will miss out on the chance to reach their full potential, imperiling our democracy in the process. If the diverse cohort of young adults who constitute the Millennial generation can’t improve their financial balance sheets by earning more, increasing their assets, and lowering their liabilities, their climb up the economic ladder won’t be delayed—it won’t occur at all. There is a role for all of us, and particularly our policymakers, to help this generation chart a new course.