Is because we have a certain level of confidence that the future is bright and to enjoy those positive prospects we must be prepared. But what happens when an entire generation starts feeling less optimistic about the future? Younger people around the globe are tending to favor spending now in place of more responsible saving habits of past generations.
This behavior is best exhibited in South Korea. A nation on edge, caught between capitalism and the ever-constant inconsistency of their neighbors to the north. The angst in this region has created a real psychological challenge, so bad that nearly half of all South Korean deaths for people in their 20s are due to suicide. Those that don’t succumb to this awful outcome are “stress-spending” to cope with current conditions.
One of the main reasons this is happening in South Korea is the current structure of business, which is dominated by a handful of family owned conglomerates like, Samsung, LG and Hyundai. Young entrepreneurs who don’t feel they have a shot at making it big are throwing hands in the air and saying, “Screw it, let’s go get some filet mignon!”.
South Korea isn’t alone with this behavior. The U.S. is ahead of the curve when compared to most emerging market countries, mostly because we got our “kick in the pants” during the 2008 financial crisis. Household debt when compared to disposable income had peaked at 135% in 2007 but has since dropped to 101% in 2018. China on the other hand is moving rapidly in the opposite direction where the same ratio has reached 117%, up from just 42% in 2008.
Today’s Chinese youth see money as a thing to be spent, starkly contradicting previous generations devotion to saving and commitment to supporting family members. What is further concerning is that young Chinese don’t really seem to care that they are on a poor retirement saving trajectory. But the real concern arises when the unavoidable rainy day happens, and the dominos start to tumble.
For instance, there will be a large impact felt in China if job growth slows. The job market has changed in China over the decades; 1978 saw just 165,000 people graduate from college. Compare that to 2019, when more than 8 million Chinese youth are expected to earn their degrees and hit the streets of Shanghai, Beijing and Hangzhou. When jobs are cut, millions will be left with debt they cannot pay.
Here in the U.S. we face a slightly evolved situation that finds today’s youth saddled with large amounts of college debt. Eric and I alternate semesters teaching a personal finance course at UVM to undergraduates and take a poll each semester. Last semester 62% of students polled expect to graduate with debt. Of those facing a life of debt after school, the average amount owed is $25,000 and 16% say they will be on the hook for over $50,000. This doesn’t include potential costs of medical school, law school or graduate school.
With total student debt exceeding $1 trillion dollars it’s no big surprise that younger workers spend their income differently. Home ownership is way down amongst young Americans, with over 40% claiming it will have to wait until debt can be paid off.
One pattern we are happy about is the adoption by companies to auto-enroll new employees into 401ks. We preach in our UVM course that students need to, at a minimum, put 10% of their income aside for retirement once they join the workforce. But studies show that many don’t get started until they are 5, 10 or even 15 years into their working careers. A study by Vanguard recently showed that the average percentage of income being contributed to 401ks, for all ages, has essentially been flat since 2004 at around 10%. The grim reality is that two-thirds of millennials have nothing saved for retirement, frightening!
A student earning $50,000 after graduation and putting away 6% of their paycheck into a 401k with a 4% employer match, could expect to have saved close to $2 million dollars by retirement. But if that person waits until they are in their early 30’s to start saving, they will have saved less than half what they could have if they started right after college.
As a parent to three young children, I pray that optimism for a bright financial future returns soon.