Why Were Young Families Hit So Hard by the Recession?

Thinkstock/Sky View

Families of all ages lost wealth in the aftermath of the Great Recession. But while the oldest families were slightly better than expected by 2016, the youngest families still had wealth levels below what was expected.

The latest essay in the Demographics of Wealth series, produced by the St. Louis Fed’s Center for Household Financial Stability, examined the connections between people’s birth years and their financial well-being. This essay was written by Lead Economist William Emmons, Policy Analyst Ana Hernández Kent and Lead Analyst Lowell Ricketts, all with the Center.

Lagging Behind

The authors studied six groups of families based on birth decade—people born in the 1930s through the 1980s—and found that all six groups had median wealth levels comfortably above what would be expected in 2007, just prior to the Great Recession. Using Survey of Consumer Finances data for all families, the authors constructed a life cycle model that predicts the level of median wealth that families would have at each age. This allowed the authors to determine how families born within a specific decade fared compared with the predicted wealth trajectory.

Wealth levels declined among all groups following the recession. By 2016, the three oldest groups of families—those born in the 1930s, 1940s and 1950s—had all returned to above-expected median wealth. However, the three youngest—those born in the 1960s, 1970s and 1980s—were still below those benchmarks. For example:

• A family headed by someone 52 years old (born in 1964) in 2016 had 11 percent less wealth than would be expected.
• A typical family headed by a 42 year old (born in 1974) had 18 percent less wealth than expected.
• A typical family headed by a 32 year old (born in 1984) had 34 percent less wealth than expected.

Why the Lower-Than-Expected Wealth?

Emmons, Kent and Ricketts also examined several potential reasons why these families remain below their wealth benchmarks. Overall, they noted, “Income and saving trends appear to be relatively unimportant, while several financial indicators—especially debt and homeownership—loom large.”

Income

The authors noted that higher income obviously allows for more saving. It can also signal other wealth-building influences, such as patience, cognitive/noncognitive abilities or access to employer-provided and -subsidized retirement plans.

However, these families have all fared well in terms of income. “To be sure, families headed by someone born before 1960 have done even better, but there is no reason to believe that income shortfalls either before or after the Great Recession are an important source of wealth shortfalls,” Emmons, Kent and Ricketts noted.

Saving

The authors also showed that the saving habits of younger families aren’t unusual compared with those of older generations. “The Great Recession appeared to lower the share of families that saved across all birth cohorts, but these rates then recovered,” they noted.

Debt

Beginning with the 1930s group, each subsequent group generally had more debt relative to income than the previous group at the same age. In fact, the 1970s and 1980s groups are on track for higher debt burdens at any given age than any previous cohort, the authors noted.

Housing

“Moving into homeownership at an early age made many young families vulnerable to the economic and financial shocks of the Great Recession,” Emmons, Kent and Ricketts wrote.

Families in the 1960s and 1970s cohorts had homeownership rates above predicted levels before the Great Recession, but those rates fell below predicted levels by 2016.

Families in the 1980s cohort were generally too young to have been homeowners during the housing bubble. However, they tend to have nonmortgage debt such as student loans and auto loans. “Because none of these types of debt finance assets that have appreciated rapidly during the last few years—such as stocks and real estate—they have received no leveraged wealth boost like that enjoyed by older cohorts,” Emmons, Kent and Ricketts noted.

Notes and References

¹ Using Survey of Consumer Finances data for all families, the authors constructed a life cycle model that predicts the level of median wealth that families would have at each age. This allowed the authors to determine how families born within a specific decade fared compared with the predicted wealth trajectory.

Additional Resources

• Demographics of Wealth: A Lost Generation? Long-Lasting Wealth Impacts of the Great Recession on Young Families
• Dialogue with the Fed: A Lost Generation? Young Families after the Great Recession
• On the Economy: The College Boost: Grads Still Do Better Than Nongrads Financially