Millennial spendthrifts? Young are historically bad savers

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A new analysis of savno such provident pennyThe Wall Street Journal setive bunk. ings rates — calculated pinching. Not only is my lected as a prototypical example If you look at all of Moody’s by Moody’s Analytics, generation not saving a heavily indebted, 26-year-old data, going back several deand based on Federal Reanything, we’re spending college grad in Southern Marycades, you’ll notice that young serve data — has gotten a more than we bring in: land. So quick is she to fritter people almost always have had lot of attention for the sharp diWe have a savings rate of negaway her funds that most of her a negative savings rate, with vision it shows between the fiative 2 percent, which means paycheck “doesn’t even make it “dissavings” for earlier genernancial habits of Kids Today and we’re burning through assets or to a conventional bank account.” ations of youth far worse than those of everyone else. Older and taking on debt. Instead, the story notes, her that among today’s supposedly wiser Americans are prudently These numbers have inspired earnings have been drained by irresponsible millennials. The building up their nest eggs, provarious condemnatory headlines “a trip to Central America, a only brief periods when people ducing savings rates of 3 perand think pieces about my genwedding in Southern California, 34 and younger were successcent among people age 35 to 44, eration’s irresponsible savings a bachelorette party in Austin, fully socking away savings were 6 percent among people 45 to deficit. The more sympathetic Texas, trips to Atlanta and Char- two years in the early 1990s, and then again from 2009 to 2012, when every age group’s savings rate went up.

“That’s not atypical,” Mark Zandi, chief economist at Moody’s Analytics, told me. “When the economy is bad we see a lot of precautionary savings, as people get panicked and run for the bunker.”

Ideally, Americans of all ages would have some funds stashed away for a rainy day, well before a “Great Recession”-level tempest rolls through. But it shouldn’t be surprising that the young are historically so bad at saving.

Maybe immature whippersnappers haven’t yet learned to make tough, self-denying decisions. Also consider, though, that they’re in the early years of their careers — about two decades ahead of their peak earning years — yet are reaching huge, expensive life milestones such as having kids and buying their first homes. Threequarters of first-time homebuyers are younger than 33, according to the National Association of Realtors.

The unfortunate synchronicity of these two factors (entry-level pay, costly life milestones) suggests that young people will almost always have lower savings rates than their elders, even before you consider other factors such as student loan debt and exotic bachelorette parties. If youth is wasted on the young, perhaps positive cash flow is wasted on the middle-aged. In any case, if you believe that people make spending decisions based on how much they expect to earn over the course of their lives — one of the landmark concepts that won Milton Friedman his Nobel Prize — it’s not so troubling that Americans have low to negative savings rates when they’re young.

That’s not to say there aren’t cohort effects, in addition to the life-cycle effects I just mentioned. People whose formative financial years were shaped by the Great Depression, the so-called “Depression babies,” tend to be more risk-averse and have higher savings rates, after all. Given that millennials just went through a similar, if milder, period of economic turbulence, we may end up far more miserly than the legions of boomers now maligning us for our purported prodigality — not to mention our moral decadence, grating music and frowzy fashion sense, among other standard young-person sins.

“The boomers didn’t live through any kind of terrifying economic event like this, and were more carefree and willing to spend,” Zandi said. “They also lived through a period of rapidly rising asset values, so they felt like they were wealthy and could get by without saving as much.” As a result, he added, “millennials may well end up being more cautious than their parents, financially speaking.” Catherine Rampell’s email address is crampell@ washpost.com. Follow her on Twitter, @crampell.