I feel bad for millennials. Laden with student debt, too poor to purchase a home, and struggling to gain a foothold in the labor market, America’s young adults seem to represent everything that’s still wrong with the economy. Adding insult to injury recently is a series of articles chiding them for not saving some approximation of $12,000 a year for retirement (despite the average millennial income still hovering around $31,000). After reading about their gloomy prospects, many millennials would be forgiven for thinking saving anything at all for retirement is an ultimately doomed exercise in futility.
It’s true that the more and sooner you can start saving the better—the miracles of compounding interest means early saving is worth more in the future. And millennials are wise to save all they can for retirement. But despite what has become a trendy theme, young people shouldn’t worry if they can’t devote half of their income toward retirement saving right now. History and economics suggest they’ll probably be alright.
The truth is young people have never been particularly good savers. Older people save more for the simple reason that 10% of their income is almost aways larger than 10% of a younger person’s income. But older people also have a higher savings rate. In 1994, long before millennials were thinking about retirement, Stanford University economist Orazio Attanasio measured the saving rates of different age groups for the National Bureau of Economic Research.
Early on, most people, of all generations, struggle just to pay rent. As they get older, they advance in their careers and start to earn more money; but they also accrue more expenses in the form of children and mortgages, so saving remains hard. Most people only start accumulating serious assets late into middle age when their salaries are at their highest and they have fewer financial pressures.
At the rate they are going, millennials are actually better savers than their parents. According to data from the Federal Reserve’s Survey of Consumer Finances, in 1989 only 31% of 23 to 34 year-olds had any retirement savings; by 2013, 44% did. True, work place 401(k) plans have become more common. But even among young people who do have a retirement savings account, the average millennial’s pension account balance is almost twice what his parents was at his age.
Young adults (including those without retirement savings) actually have more financial assets than young people did a generation ago. Of course, other economic markers are not quite so rosy. Due to the increase in student debt and the decrease in homeownership, young people today have a lower net worth (total assets minus debt) than their peers in 1989 did at this age.
But net worth does not include the largest asset young people own, their future earnings. And when you include future earnings, even with student debt, millennials may be wealthier than their parents. That’s because the average millennial is better educated and his earnings are worth more. According to the Census’ Current Population Survey, in 1994, only about 25% of 23 to 35 year-olds had a college degree; in 2013, around 35% did. College graduates not only earn more when they are young, they get bigger raises throughout their career. Even taking into account the fact that college earnings aren’t what they used to be, it is still much better to be a college graduate today than a high school graduate 20 years ago. (Those concerned about the very real problem of wage stagnation should remember that even though our national prosperity has gone down, individual workers should still expect raises as their career progresses.)
Of course, being better prepared for retirement than your Boomer parents isn’t exactly something to brag about, either. Boomers are nearing retirement with, on average, just $111,000 in their retirement accounts. This translates to roughly $6,000 a year of income—not a lot of money to live on, barring other sources of cash.
But for now, assuming millennials won’t have to start supporting their parents anytime soon, it seems the futures of America’s young adults aren’t doomed just yet.