Generation gap + income gap = The Kids Aren’t Alright

 Bankruptcy, Consumer Law  Comments Off on Generation gap + income gap = The Kids Aren’t Alright
Nov 092011

We all know how hard it used to be for prior generations – struggling to get to school in the dark, through deep snow, uphill both ways  – you know the jokes.  However, what made that joke funny was the hope – nay, the knowledge – that the younger generation was going to have a better life than the one before, and that one’s assets and net worth would increase over time.  Now, those expectations are in real jeopardy. 

According to a new report from the Pew Research Center, the wealth gap between the older and the younger generations as stretched to the widest on record.  There are two aspects to this study: (1) how much wealthier each age group is as compared to the younger generations, and (2) how the wealth of each age group has changed over the past 25 years.  

Let’s start with (2) – same generations, different years.  After adjusting for inflation, the net worth of households, as a whole, increased by 10% from 1984 to 2009.  Not bad, right?  However, breaking that down by age group, the disparity of the changes between the groups is huge.  At the “top” end of the age spectrum (households headed by an adult 65 or older), the net worth increased by 42% from 1984 to 2009.  However, in that same period of time, the net worth of households headed by an adult under 35 decreased by 68%.  Households headed by those between 35 and 44 didn’t fare much better – their net worth decreased by “only” 44%.   At least there is still some net worth – in 2009, 20% of households had no or negative net worth (compared with 11% in 1984). 

Next, we look at (1) – the gaps between the generations themselves.  In 1984, the wealth disparity between the over 65 and the under 35 crowds was only 10 to 1.  In 2005, it was 22 to 1.  In 2009, it was 47 to 1.  And the numbers themselves cause concern – the median net worth for the under-35 crowd dropped from $11,521 to just $3,662.  That is only one medical emergency, one blown transmission, or one dead furnace away from having no net worth at all. 

Why is this?  I’m sure some of this related to the various save/spend policies of each generation – and each younger generation seems to focus more on the “spend” aspect (or maybe I’m just becoming one of those old fogeys).  However, other factors noted in the report include:

  • Declining home values, leading to decreased equity.  This has a greater impact on the those with newer mortgages with balances at (or more than) the home’s value. 
  • Delayed marriages and increases in single parent households.  Not sharing housing and child-rearing expenses with a spouse (or spousal equivalent) definitely leaves less $ available for saving for the future. 
  • Delayed retirement.  This not only increases the income (and assets) of those keeping their jobs, but also delays employment for the person that would have otherwise filled the vacancy caused by retirement. 
  • Higher debt loads – especially student loans.  And don’t forget that student loans are forever – if you can’t afford them, you can’t get rid of them in bankruptcy.  Ever.  Well, unless you’re dead.  Maybe. 

So, what to do? 

  • Tackle the student loan debt problem.  There are plenty of contributors to the problem – the schools who charge way too much for way too little, because that’s how they make money; the lenders who pass out loans like Halloween candy, knowing that the government will foot the bill, even if the student can’t; and the students who treat loans like “free” money or a substitute for a real income, with no understanding (or complete denial) of the impact these loans will have on their ability to build a post-school life.  If we make student loans dischargeable – or, at least, treat them like taxes (e.g., priority debts, and dischargeable after so many years have passed), then lenders will act like lenders and less like over-indulgent grandparents, and schools will be forced to evaluate prospective students for their ability to make a (real) living with the degrees the schools are selling, and control the costs of getting a degree.   And, at the very, VERY least, if student loans are SO important that they can’t ever be discharged, can we at least force students (and their co-signing parents) looking for student loans to get at least the same amount of “education” that we require those filing bankruptcy to get?  It may be the only real “education” some of these students actually receive. 
  • Allow for cramdown of mortgages on primary residences in bankruptcy.  Right now, if you owe more than your house is worth, you file bankruptcy, and you want to keep your home, the bankruptcy court can’t help you much.  Unless you convince the lender to reduce your principal (and good luck with that), you will be stuck with that ugly principal balance.  Even if you get a modification, the payment reductions come from reduced interest rates and longer terms, not a drop in the total amount owed.  Giving homeowners the power to reduce their principal balances in bankruptcy might get the mortgage lenders to start coming up with better modifications – before a homeowner has to resort to bankruptcy to survive. 
  • Another suggestion (thanks to Harry Holzer, a labor economist and public policy professor at Georgetown University) is to consider re-allocating at least some the federal government’s resources used for retirees’ to the younger generations, and to minimize (or reverse) cuts made to education and cash assistance for poor families.   Nice, but not likely to succeed under the current regime. 

 We’re not done yet.  These numbers will get worse before they get better (if they get better).  And if we, as the individual people whose actual lives go into these numbers, don’t take care of ourselves, who will?