Financially speaking, it’s tougher than ever to be young in America these days. The country is still rebuilding its economy after a recession. Unemployment rates are going down, but jobs are still tough to find for new graduates and many are saddled with enormous student loan debt.
Wealth accumulation has followed a predictable pattern in past generations: As people got older, they amassed significant assets through variables like college education, income, savings, length of home ownership and inheritance. However, even though the baby-boomer generation is in the process of transferring its life savings to the next generation (an estimated $30 trillion), every generation since has faced tougher economic conditions to accumulating wealth, with millennials facing the toughest uphill climb so far.
And the gap is not only between generations. A racial and gender divide puts women and minorities at a further disadvantage for accruing wealth.
The age wealth gap
Young people have always been poorer than older people who have been working longer, own property and have had many more years to acquire assets. But now, young people face even bigger financial deficits in the form of student loans, nascent mortgages (that have little equity) and little savings. This puts them at less than zero (negative net worth) as they are starting out and makes the road to financial security much longer and steeper.
The wealth gap between generations is growing wider, according to a 2015 paper by St. Louis Fed’s Center for Household Financial Security. In 1989, older families had 7.6 times more median wealth than young families. By 2013, this figure grew to 14.7 times. According to those economists’ calculations, a person born in 1970 has 25 percent less income and 40 percent less wealth than an identical person born in 1940. Generation X is faring worse than boomers, and millennials are going further into negative numbers early in life than any generation has before.
A PwC report, Millennials & Financial Literacy, found:
- Millennials have little financial knowledge. When tested, only 24 percent demonstrated basic financial knowledge.
- Thirty-four percent are not happy with their financial situation.
- More than half (54 percent) are worried about repaying their student loans.
- Eighty-one percent have at least one long-term debt.
- Nearly 30 percent are overdrawing on their checking accounts.
- Forty-two percent use Alternative Financial Services (AFS) heavily, including payday loans, pawnshops, auto title loans, tax refund advances and rent-to-own products.
- More than 20 percent with retirement accounts took loans or hardship withdrawals in the past year.
- Even with little financial knowledge, only 27 percent are utilizing professional financial advice on saving and investment.
- Only 8 percent demonstrated a high level of financial literacy.
The racial wealth gap
The age wealth gap doesn’t take into account other factors that have worked against minorities for decades — such as predatory lending practices, barriers to employment and income advancement, and exclusion from government programs — that gave white families a boost and widened the racial wealth gap.
In 2014, the New Republic’s Dean Starkman examined the racial wealth gap. He found that just looking at income, African Americans have made significant strides since the Civil Rights movement, but the wealth gap tells a different story. In 1984, the median working-age white family had inflation-adjusted assets worth $90,851, compared to $5,781 for the median black family of working age. Twenty-five years later, the median wealth for white families had grown to $265,000 versus a $28,500 median for black families.
In The Roots of the Widening Racial Wealth Gap report, researchers from Brandeis University noted another factor: Since historically African Americans have overwhelmingly been employed in fields less likely to offer employer benefits like health care, paid sick or vacation leave, and retirement plans, more of their resources are needed to cover emergencies and daily expenses. At the same time, more whites have historically held jobs with benefits and can save more of their earnings. So, every $1 of income for whites results in $5.19 in new wealth over 25 years, while $1 of income for a black family only adds 69 cents to their total wealth.
“A penny saved is a nickel earned for whites – but less than 1 cent for blacks,” Starkman of the New Republic found.
The gender wealth gap
In the 2015 Women and Wealth study, author Mariko Chang found that since more women are going to college than men, more families will rely on women’s earnings than ever before.
“Two-thirds of mothers are either the sole breadwinners, primary breadwinners (earning the same or more than their partners) or co-breadwinners (earning 25 to 49 percent as much as their partners).”
Yet a severe gap exists across all family situations, ages and races. The report found that some of the factors obstructing women’s wealth are:
- Median wealth for single women is $3,210, compared to $10,150 for single men.
- Single women have 32 cents for every dollar of wealth men have.
- Single black women have a median wealth of $200. Single Hispanic women fare even worse at $100 – less than a penny for every $1 of wealth owned by single, white, non-Hispanic men.
- Millennial women have a median wealth of $0.
- Women 35-49 have median wealth of $1,000 (4 percent as much as men 35-49).
- Millennial women are more likely to have education debt then millennial men (49 percent versus 32 percent).
- Median wealth for men with a high-school diploma is almost $2,000 more than women, and at the graduate-school level, it is $51,000 higher than women with same level of education.
- Mothers have only 20 percent as much wealth as fathers.
- Black mothers have median wealth of $0; Hispanic mothers have $50.
- Women are more likely to have every type of debt, and the median debt for women is 177 percent higher than the median debt for men.
Another study, What Do Women Breadwinners Want?, found that as women breadwinners are becoming more common, 40 percent of women surveyed feel that family and friends pressure them to downplay their breadwinner status, with 28 percent reporting that their parents disapprove of their breadwinner status. At the same time, the survey found that 95 percent of women will be their family’s principal financial decision-maker at some point in their lives. Breadwinner women also assume more than 75 percent of all financial planning and as much as 90 percent of the responsibility for charitable giving, paying for college, retirement planning and overall saving.
What exacerbates all of these factors, the study reports, is the fact that many women breadwinners have little confidence in their wealth-management skills, and even those who work with financial advisors are less than satisfied. They require a wide range of financial services and strategies and rarely get them.
One solution? More financial knowledge
The factors and possible solutions for all angles of the wealth gap vary widely, but one solution that could address many of them is better financial literacy.
In 2012, PwC announced a five-year, $160 million initiative called Earn Your Future aimed at increasing financial literacy for more than 2.5 million students and educators. The company developed educational materials to teach financial skills in grades 3-12, covering topics like credit, identity theft, saving for college and financial planning. The materials are free and available to anyone. Research showed that less than 20 percent of teachers feel prepared to teach financial literacy, so PwC partnered with Knowledge@Wharton High School to train them.
“It is incredibly inspiring,” said Shannon Schuyler, who heads up corporate responsibility for PwC. She described going to a high school in Queens and “watching the light go on” when students realized that they could really understand how to manage money. PwC brought in famous athletes — people the kids think make millions — and had them go through how much they actually make. Then they asked the kids what they would buy with a million dollars. Soon, Schuyler said, the kids see that a million dollars really doesn’t go that far.
Other speaker advice? “Save 10 percent of anything you make, and you will always be safe.”
When the students see that they can actually do that, they feel like they have control over their future, Schuyler told us.
In a report released this week, PwC found that educators have realized extensive benefits in providing financial education. Millennial teachers are leading the way, with 62 percent encouraging financial education starting in elementary school.
One problem, Schuyler said, is that kids may learn good financial lessons at school, but when they don’t see that behavior at home — their parents have poor financial habits — they abandon what they’ve learned and mimic their parents’ decisions. Financial education still isn’t seen as a life skill.
Four years in, PwC has committed $30 million more (in 2015), and the program has succeeded past all estimates, reaching 3.5 million students and educators. Looking ahead, Schuyler said the company is discussing investing $350 million to $500 million more over the next five years.
“Regardless of where people end up growing up and working, we are an ecosystem,” Schuyler said. “Having more savvy and being able to be more responsible impacts us all, and making better [financial] decisions impacts us all, whether you work for a mom-and-pop shop or a big corporation.
“This is incredibly important for people to have that appreciation, because we rise together and we fall together. The more educated we are, the more [financially] resilient we can be together.”
image credit: Got Credit via Flickr creative commons