How bad off is Generation Debt?

Earlier this year I blogged about whether twentysomething were genuinely facing tougher economic times than their predecessors -- or whether they were just whiners (click here for the latest example). There's been a few reports issued this month that touch on this issue... and the evidence ranges from mixed to favorable. This report on asset accumulation and savings among young Americans by Christopher Thornberg and Jon Haveman suggest a worrisome trend -- Generation Y doesn't save as much as prior generations: In 1985, about 65 percent of Americans aged 25 to 34 owned some form of savings instrument... including traditional savings, money market accounts, certificates of deposit, and other financial investments, such as stocks and bonds, Keogh, IRA, and 401(k) accounts. Between 1985 and 2000, the proportion of this population that owned one or another of these savings instruments fell from 65 percent to 59 percent, a decline of just under 6 percentage points. Between 2000 and 2004, the decline accelerated, when it fell another 4 percentage points, a pace two and a half times faster than in the previous 15 years. This is consistent with a declining emphasis on savings within this group.... Table 2 indicates a decline in the use of regular interest-bearing savings accounts. At the same time the proportion of the population invested in stocks and bonds increased from 13.6 percent in 1985 to 14.7 in 2000, but dropped to just 12.8 percent in 2004. Those owning non-pension retirement accounts stayed roughly constant at just over 25 percent. It is plausible that young Americans were more inclined to invest in the stock market between 1985 and 2000 because of the large returns that were available. However, this same logic would suggest a return to the safety provided by savings accounts in the early part of this decade, when the returns were not as good. Quite the opposite happened; the movement away from savings accounts continued. An alternative explanation is a shift to other forms of asset accumulation, such as home ownership, real estate, or private business. Between 1985 and 2004, the rate of home ownership among these individuals increased from 37 percent to 39 percent, but ownership rates of other real estate and private businesses declined substantially. Therefore, the explanation most consistent with observed declines in ownership of savings instruments is an overall reduced emphasis on saving.... The mean net worth for individuals between the ages of 25 and 34 increased by 4 percent between 1985 and 2004, much more slowly than income levels for this group. This is the exact opposite situation for the U.S. economy which has seen assets grow at a faster rate than income. Sounds bad. However, Thornberg and Haveman dig into the reasons why young Americans aren't saving as much, and comes up with some interesting partial answers: Contributing to the decline in median net worth are changes in demographic patterns among these young individuals. In particular, there are significant changes in three categories that are highly correlated with median net worth. Between 1985 and 2004, the proportion of the population aged 25-34 that was married declined by 8 percentage points, the proportion of whites declined by 17 percentage points, and the proportion with education beyond high school increased by 13 percentage points (Table 4). The decline in marriage rates and the increasing share of the population made up of people of color have contributed to the declines in net worth while increasing levels of education offset these declines. Taken together, these demographic shifts are responsible for just over one-quarter of the change in median net worth among young Americans. Assets are only one side of the equation, however -- what about debt? Here the answer is more positive. The MacArthur Foundation has funded a study of Generation Y debt by Ngina Chiteji that suggests the Anya Kamenetz/Generation Debt thesis doesn't hold up: Ngina Chiteji in her chapter in The Price of Independence takes a careful look at debt in young adulthood, finding that, contrary to popular perception, most of today?s young adults are not carrying an unusual or excessive amount of debt, at least not by historical standards or given their time in life, just starting out. The fraction of indebted young adult households age 25 to 34 has barely changed in 40 years, and while, in general, young households carry more debt than the population at large, this is consistent with the predictions of economic theory and most young adults appear to have manageable debt loads.... Because viewing debt levels or borrowing behavior in isolation may provide an inaccurate picture of the extent of the problem, Chiteji also asks not whether debt per se is a problem but whether there are young adults whose overall financial position is weak. About 17.5% of young adults could not meet three months? worth of their existing debt repayment obligations with their current savings (if financial assets are used to gauge a household's savings). The comparable figure is about 16.5% if using net worth to measure household savings. Approximately 8.5% of young adults have no financial assets. Moreover, this group with no savings (or zero or negative net worth) owes almost $24,800 (on average), with an average monthly payment of $381. The median values are a bit lower?$14,650 and $300, respectively. However, these levels could still be considered troublesome given that these are households with no savings to cushion them should they lose a job or other sources of income. As a whole, are young adults in trouble? On average, young adults use only 19% of their monthly income to service their debt. Typically, only households that need 40% or more of their monthly income to pay debts are considered to have burdensome debt levels (and to be experiencing "financial distress"). About 9.3% of young households are in financial distress, slightly lower than the 11% for U.S. households overall. Therefore, as a group, today?s young adults do not appear to have an unusually fragile or problematic financial situation. Young adult households are not remarkably different from other families in the nation. However, the research also finds that there are some young adult households whose financial situations appear troublesome. Policymakers and others certainly might want to direct their attention to these households. Given that the data suggests -- a) More young Americans are buying homes; b) More young Americans are going to college; and c) "Young adults do not appear to have an unusually fragile or problematic financial situation." -- I confess to remaining unpreturbed about the state of Generation Y's finances. Question for Gen Y readers -- which report better conforms to you personal experiences and those of your cohort?