Millennials were screwed by the financial crisis. They might still come out on top.

Kids these days.
Kids these days.
Image: AP Images/Kevin Rivoli
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The scars remain nearly 10 years after the financial crisis.

A new research paper (pdf) from the Federal Reserve Bank of St. Louis, looking at the collateral damage on household finances, estimates that Americans born after 1960 still have less wealth compared to previous generations. Millennials, or Americans born in the 1980s, fell furthest behind. Their net worth is about 34% lower than what previous generations had at their age.

The Fed estimated a benchmark level of wealth, for each age, based on almost 30 years worth of data. By 2016, they estimate older generations are better off than the benchmark, but younger generations are behind. And the younger they are, the worse off they are.

But despite what has been reported elsewhere (paywall), that does not necessarily mean they are falling behind. The data simply reflects that many millennials took a different bet—and it still might pay off.

If you look at things like retirement savings, millennials are actually in good shape. The Fed noticed:

  1. Millennials earn similar income to previous generations;
  2. Millennials save about the same amount; they even save a little more than Gen-Xers.

They’ve saved more than other generations. Where they fall short is homeownership and student debt. During the recession, young people avoided a bad labor market by taking out loans and getting more education. After the recession, they were too cash-strapped, or too traumatized from the housing crisis, to buy homes. It had devastating effects on their wealth as the Fed measures it, assets minus debt.

But, in a sense, millennials are not poorer. They just made a different investment. Previous generations also took out loans, but they used that money to buy homes instead of investing in education. In the modern economy, education may be a better bet than housing. Men with a college degree can expect to earn $900,000 more during their lifetime (assuming you finish college, which many people don’t), more if they get a graduate degree. Depending on where you live, the average house may not pay off as much.

The Fed data is biased to rewarding investing in housing over education. Their asset measure includes housing equity (the value of the house minus value of the mortgage). When it comes to education, the data only captures loans, not the increase in future earnings.  If the Fed included projected future earnings when they measure assets, millennials would look a lot better off—perhaps better than previous generations.

Of course, there are good reasons for the Fed to leave out future earnings. They are an asset, but unlike housing equity, it is hard to borrow unearned income at a cheap interest rate. You can sell a house and get equity immediately. You can’t sell a claim on future earnings—not yet anyway.

But it is worth considering if, in an economy that rewards education more than before, our traditional measures of wealth still make sense.