Generations born since the 1960s are accumulating no more wealth than those born a decade before them. In the case of the 1980s generation, those in their early 30s actually have about 20 per cent less wealth on average than those born in the 1970s had at that age. This is a break from the pattern of sizeable generation-on-generation increases in wealth achieved by those born between the 1930s and 1950s.
Why has wealth accumulation stalled for younger generations? Are today’s young people profligate spendthrifts who are failing to save enough? The image of millennials munching on avocado toast, unconcerned with putting away some money for the future, has certainly gained currency. Policymakers are worried that today’s young won’t be able to enjoy the standard of living in later life that they might expect. With more than 1 in 10 of the 1980s generation expected to live beyond 100, the adequacy of savings is clearly important.
But just because younger generations are not accumulating more wealth, this doesn’t necessarily mean they are not saving appropriately. Each generation faces a different environment for accumulating wealth, and younger cohorts have seen much less favourable conditions than their predecessors. While house prices increased rapidly compared with earnings up until the 2000s, boosting the wealth of older homeowners, younger generations have been hit by the financial crisis and its legacy of low earnings growth and more muted asset returns.
In new research, we find that the changing economic environment has big implications for how much wealth we would expect each generation to accumulate. The stalling of wealth accumulation among younger generations seen to date may in fact be a reasonable response to the conditions they face: in particular, stagnant earnings and lower returns to savings.
While the future economic outlook is very uncertain, if earnings growth recovers and returns to savings and housing increase (though not to the levels experienced by previous generations) then we would expect that younger generations will eventually accumulate more wealth than their predecessors. But even then, because younger generations are expected to live longer and receive less generous state pensions than older generations, they would still see a bigger drop-off in their income at retirement than today’s pensioners, unless they work considerably longer into older age.
What should policymakers do about it? Young people face a more challenging environment for saving than their predecessors. If stalling wealth accumulation is an appropriate response to this, then policies that try to increase savings rates without changing the conditions people face (either by putting more money in their pockets or increasing the returns on their savings) risk doing more harm than good. The problem appears to be underlying economic trends, not the behaviour of young people.
Rowena Crawford is associate director and David Sturrock research economist at the Institute for Fiscal Studies.
This article was first published in The Times and is reproduced here with permission.