Lisa Dettling, The State of the Balance Sheets of Younger Americans

May 8, 2014

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Welcome

   James Bullard, Federal Reserve Bank of St. Louis (5:54)

Keynote Address

- Introduction
   Ray Boshara, Federal Reserve Bank of St. Louis (4:05)

- Keynote Address
   Neil Howe, Founding Partner and President, LifeCourse Associates and President, Saeculum Research (36:03)

   Keynote Q&A (11:04)

   Extended Interview with Keynote Speaker Neil Howe (28:43)

Plenary One — A Micro and Macro Look at Younger Americans' Balance Sheets

- The State of the Balance Sheets of Younger Americans
now playing  Lisa Dettling, Board of Governors, Federal Reserve System (14:25)

- Links Between Younger Americans’ Balance Sheets and Economic Growth
   William Emmons, Federal Reserve Bank of St. Louis (21:40)

- Discussant:
   Steve Fazzari, Washington University in St. Louis (18:14)

   Plenary One Q&A (15:06)

Plenary Two — Student Loans

- Student Loans and the Economic Activity of Young Consumers
   Meta Brown, Federal Reserve Bank of New York (21:12)

- Does Parents’ College Savings Reduce College Debt?
   Melinda Lewis, University of Kansas (18:11)

- Discussant:
   Alex Monge-Naranjo, Federal Reserve Bank of St. Louis (19:01)

   Plenary Two Q&A (18:22)

Welcome

   Michael Sherraden, Washington University in St. Louis (2:52)

   Clint Zweifel, Missouri State Treasurer (6:26)

   Tishaura Jones, City of St. Louis Treasurer (6:14)

Concurrent Session I

- Moderator:
   Julie Birkenmaier, Saint Louis University (4:36)

- Toward Healthy Balance Sheets: The Role of Savings Accounts for Young Adults’ Asset Diversification and Accumulation
   Terri Friedline, University of Kansas (22:23)

- Financial Decisions of Young Households During the Great Recession: An Examination of the SCF 2007-09 Panel
   Wenhua Di, Federal Reserve Bank of Dallas (19:00)

- Discussant:
   John Sabelhaus, Board of Governors, Federal Reserve System (14:38)

   Session One Panel Response (6:57)

   Session One Q&A (5:41)

Concurrent Session II

- Impacts of Child Development Accounts on Change in Parental Educational Expectations: Evidence from a Statewide Social Experiment
   Michael Sherraden, Washington University in St. Louis (13:09)

- Trends and Patterns in the Asset Holdings of Young Households
   Ellen A. Merry, Board of Governors, Federal Reserve System (15:19)

- Discussant:
   Trina Williams Shanks, University of Michigan (7:06)

   Session Two Q&A (28:58)

Plenary Three — Homeownership

- Moderator:
   Todd Swanstrom, University of Missouri–St. Louis (5:54)

- Homeownership and Wealth Among Low-Income Young Adults: Evidence from the Community Advantage Program
   Blair Russell, Washington University in St. Louis (15:57)

- Aggregate and Distributional Dynamics of Consumer Credit in the U.S.
   Don Schlagenhauf, Federal Reserve Bank of St. Louis (21:53)

- Discussant:
   John Duca, Federal Reserve Bank of Dallas (13:59)

   Plenary Three Panel Response (6:40)

   Plenary Three Q&A (8:46)

Plenary Four — Economic Mobility

- Moderator:
   Jason Purnell, Washington University in St. Louis (2:00)

- The Balance Sheets and Economic Mobility of Generation X
   Diana Elliott, Pew Charitable Trusts (17:58)

- Coming of Age in the Early 1970s vs. the Early 1990s: Differences in Wealth Accumulation of Young Households in the United States, and Implications for Economic Mobility
   Daniel Cooper, Federal Reserve Bank of Boston (17:11)

- Discussant:
   Bhashkar Mazumder, Federal Reserve Bank of Chicago (16:15)

   Plenary Four Panel Response (3:14)

   Plenary Four Q&A (19:02)

Closing Reflections: From Research to Policy

   Michael Sherraden, Washington University in St. Louis (15:59)

   Ray Boshara, Federal Reserve Bank of St. Louis (9:30)

Thank You / Adjourn

   Julie Stackhouse, Federal Reserve Bank of St. Louis (5:59)


Transcript

Below is a full transcript of this video presentation. It has not been edited or reviewed for accuracy or readability.

James Fuchs: So, ladies and gentlemen we are going to move directly into our first Plenary Session of the day. The title of that session is a Micro and Macro Look at Younger Americans Balance Sheets. So I would like to invite our two groups of presenters to come up. And we look forward to our first discussion. So, I’m turning it over to you. Right, Dave? All right. So, I’d like to turn it over right now to our Moderator for this very first session, Dave Wheelock. He is a Vice President and Economist here at the Federal Reserve Bank of St. Louis. Thank you.

David Wheelock: Thank you, Jim. On behalf of the Research Division of the Federal Reserve Bank of St. Louis I’d also like to welcome you to the bank and to the conference. As Jim said I’ll be moderating the first session. We have two papers. The first titled The State of the Balance Sheets of Younger Americans by two economists at the Board of Governors at the Federal Reserve System; Lisa Dettling and Joanne Hsu. The second paper by our own Bill Emmons and Bryan Noeth of the St. Louis Fed titled Links between Younger Americans Balance Sheets and Economic Growth. Each presenter will have roughly 15 minutes followed by when the two papers have been presented then we will have a discussion by Steve Fazzari, Professor of Economics at Washington University here in St. Louis. So, I’m not sure. Lisa or Joanne, which one of you are going to kick off here. So, I’ll turn it over to you.

Lisa Dettling: Hi. I’m Lisa Dettling. Thanks so much for inviting me. And today we’re going to be talking about the State of Young Adults Balance Sheets using evidence from the survey of consumer finances.

So, our work was really motivated by three basic questions. The first one was, what do young adults’ balance sheets look like? And we’re going to look at things like net worth, asset holding, debt. And also some evidence on young adults experiences with credit markets. And then we also want to ask, what do you young adults balance sheets look like now in relation to the past? So, comparing them to what young adults from Generation X looked like while they were young adults. And then finally we’re going to compare today’s young adults to older adults. So, individuals from other cohorts and see how they, the two groups faired in the great recession.

So, what we’re going to do is use data from the survey of consumer finances from 2001 to 2010 which gives a really comprehensive view of wealth and income for American families. We’re going to focus on young adults which we define as individuals aged 18 to 31. Although we will use what we call sort of ‘middle adults’, 34 to 54 year olds as comparison. And then we’re going to compare millennials from the 2001 to 2010 period to individuals from Generation X as they looked in 1989.

So we start here displaying net worth at both the 25th median and 75th percentile of the distribution from 2001 to 2010. And we’re also going to compare on the right panel what young adults in 1989 looked like at each of those points. And what you can see is there’s this general decline in net worth really beginning in 2004 and continuing on. And there’s this, really, market drop at the 75th percentile particularly between 2007 and ’10. And you can see that today’s young adults net worth is less than it was for those of Generation X when they were young adults.

So, here we compare median net worth for young adults to median net worth for those middle adults which we call the 34 to 54 year olds. And so we’re displaying the ratio here. And what you can see is that today’s young adults’ net worth hovers around ten percent of those who are slightly older than them. And this has been fairly stable over time. Although you see this drop in the ratio between 2004 and 2007 and then a rise between ’07 and ’10. And this can really be explained by the fact that today’s young adults are just not as heavily invested in housing and stock markets so they didn’t fare as well in the boom and they didn’t do as poorly in the bust. And you can also see that relative to 1989 today’s young adults actually have a higher ratio.

So, now we’re going to split up net worth into asset and debts over time. The left panel displays assets again at the 25th median and 75th percentile. And the right panel displays debts. And you can see there’s been sort of a general downward slope in increase in debt. But this is particularly strong at the 75th percentile.

So next we start to break down asset holding into different types of assets. So what we’re showing here is the fraction of young adults who hold various types of assets. And that’s indicated by the blue bars. And then the conditional median value of those different types of assets which is indicated by the red line. And there’s a few interesting observations here. The first in the top right panel is home ownership rights. And you can see that these have fallen over time. And the values have generally followed the path of house prices. Interestingly though, today’s young adults are actually more likely to be homeowners than those of Generation X were in 1989.

You can also see in the bottom left panel ownership of retirement accounts is generally quite a bit higher than it was in 1989. Although this only includes things like IRAs and 401Ks and doesn’t try to quantify the value of defined benefit pension plan. And then finally you can see there’s this decline in stock ownership over the entire period.

So, now we do the same exercise but we look at debt. So, we’re looking at holding of various types of debt, again, in the blue bars and the conditional median value of that debt as indicated by the red line. So, you can see in the top left the credit ownership and the median value of credit card debt has declined pretty much over this entire period. And that today’s young adults are much less likely to hold credit card debt than individuals from the prior generation.

The trajectory of housing debt basically follows the same pattern as what we saw for home ownership, not surprisingly. The bottom left panel displays trends in vehicle debt ownership. And you can see that that fell quite substantially particularly between ’07 and ’10. And today’s young adults, again, are less likely to have vehicle debt than individuals from the past generation.

And then finally you can see in the bottom right panel trends in education debt. And here we see this really large run up in the fraction of young adults holding education debt over the 2001 to 2010 period. And this general increase in the median value of that debt. And this is really in stark contrast to individuals from the past generation who were much less likely to hold education debt and for whom the median value of that debt was generally lower.

So, our next exercise is to dig a little deeper into young adults’ experience with credit markets. And, in particular, their ability to pay off the debt that they hold. So, what we’re doing here is comparing young adults which are indicated by the green bars to those middle adults which are indicated by the gray bars. So the top left panel quantifies the fraction of each of those groups who pay off their credit cards in full. So, this is basically the groups that aren’t just using credit cards for convenience. And you can see that over that time period for both groups there’s this general decline in the fraction that do not pay their credit card off in full. But that compared to the previous generation the fraction that do not pay their card off is actually much lower.

Then moving onto the top right panel we’re looking at the fraction of individuals who have high payment to income ratios. And this is defined as having debt obligations that are more than 40 percent of income. And what you can see here is a really interesting pattern where between ’07 and ’10 the fraction of young adults had high income to debt ratios actually fell while it continued to rise for the middle adult group. And relative to the last generation today are much less likely to have high payment to income ratios.

And then the bottom two panels look at two measures of being late on payments. And this can be on any type of debt obligation. The first in the left is being late on payments any amount of time. And on the right is being late on payments by more than two months. And you can see the same general trend as what we saw for the debt to income ratios. You’re seeing this decrease for the young adults and the fraction who are late on payments while you’re continuing to see increases for those middle adults. And it had always been the case that young adults in the 2001 to 2007 period that young adults were actually more likely to be late on payments. But as of 2010 the older adults are actually more likely to be late on payments.

So, thus far I showed you some evidence that it seems like young adults actually seem to be doing, you know, relatively okay. They certainly seem less likely to be in delinquency and things than this older group. But it’s important to point out that although the SCF is really considered the gold standard for studying household balance sheets, it is not actually ideally suited for studying this population of young adults. And that is because young adults vary so much in who they’re living with. So, some young adults may be cohabiting with a partner. Some may be married. Some may be living alone. Some may be living with roommates. And some may be living with their parents. And it turns out that that the way that the SCF collects information on assets and debts is they’re only collected for that household head and any financially dependent individuals in the household. And so that means if we want to compare different types of young adults we really need an apples to apples comparison. So, we have to try to scale the measure for a married couple of two young adults, say, to a young adult who’s living alone. And so that’s what we do in this analysis is to construct an individual level measure.

But there’s another problem which is that income and wage information in the SCF is only collected for the household head and their spouse or cohabitating partner. So this means that any young adult who’s living at home with their parents or a young adult who’s living with an older roommate we aren’t going to capture information about them basically at all. And so what this means is if there have been changes over time in the fraction of young adults who are in these household head or spouse / partner type relationship, then we might be capturing different groups of individuals overtime. And it turns out there has been a pretty substantial recent increase in the fraction of young adults who are co-residing with a parent. And is this adjusted over the time the SCF might be capturing different groups of young adults who might be selected differentially in different ways.

So, to get an idea of what sort of selection issue might be we do an exercise here where we try to benchmark the SCF against another data source which is representative of young adults. And so we compare information on wage income from the Survey of Consumer Finances to information on wage income from the Current Population Survey. And so the median wage income for the SCF is the red line. And median wage income in the CPS is the blue line. And what you can see is there’s a pretty substantial difference there. SCF median wage income is about 10,000 dollars more than CPS median wage income. That being said, the panel on the right displays the difference between those two trends over time which indicates that this difference has been pretty constant over time even though there has been this change in living arrangements. And, in fact, the difference is about the same in 2001 as it was in 2010. So this suggests that although the SCF does seem to capture, perhaps, a select population that’s higher income which is probably not surprising since we’re capturing, you know, household heads, people who made it out. The trends, you know, we may be able to interpret as, you know, potentially not changing in their sample over time.

So, in conclusion what we find is that young adults have experienced declines in net worth, declines in asset holding, and increases in debt holding. That being said, relative to both the previous generation of young adults and older adults, young adults actually seem to be doing relatively well. They have been relative increases in net worth in the past several years. And there’s also been declines in these measures of payment delinquency and having a high payment to income ratio. It’ll be interesting when the 2013 SCF data comes out to see if this trend has continued.

As I mentioned there are these issues with the SCF only collecting information on household heads. So it’s possible that there are some consequences to these changes in debt holding that we really can’t capture in our survey. So, in particular my co-author and I have another paper where we’re looking at whether having debt and being delinquent on debt increases the probability that you will later move in with a parent. And it turns out that it does. And you can think about this as having, sort of, potentially longer term implications for, say wealth accumulation or household information. And it also sort of changes the perspective on this data that suggests we might be losing, sort of, the most vulnerable part of the population. So, thank you.

Thank you very much, Lisa.

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