Thursday, December 16, 2010

The financial nightmare of Generations X, Y

From the 20 December 2010 Greater Niagara Newspapers


By Bob Confer

One of the more endearing aspects of the American Dream is selflessness. Each generation has been driven to give their children a better life than they had. For all of American history such efforts have paid off, the standard of living improving dramatically from generation to generation.

But, there are signs indicating that portion of the American Dream may not be realized by the Baby Boomers. Their descendants - Generations X and Y - could be making a living barely better than and, in most cases, considerably lower than that of their parents.

A 2007 study showed that Generation X was earning 12 percent less than their parents had been at the same stage of their lives (the incomes were adjusted for inflation). That drop in salaries could be attributed to any number of things, none more damning than the lack of high paying manufacturing jobs that once ruled the land. Competitive cost factors have either driven those jobs to low-cost foreign countries (the US has lost 8 million manufacturing jobs since 1980) or caused domestic manufacturers to lower their wages paid (look at Delphi where traditional rates were cut by a third to a half in recent years). Even the service and high-tech jobs that replaced them are in peril; it’s estimated that 3.5 million white-collar jobs will be shipped overseas by 2015.

Therefore, today’s workers have to be willing to work for wages well below historical standards. If they don’t, Corporate America will seek a region possessed of the lowest cost – domestically or internationally - that can produce similar output.

As an outcome of attempts to overcome that and make themselves marketable for the now rare upper-middle-class job, young adults are being held back by debt in the form of college loans, something that is, in volume, unique to their generation. Back in 1973 when many Baby Boomers were coming of age, 47 percent of high school graduates went to college. 35 years later, 70 percent of their children had gone on to some college studies. About one-half of them graduate from college and, of those who do, two-thirds have debt approaching $28,000. Nationally, the accumulated college debt (across all age groups) is a staggering $830 billion.

Those obligations will ultimately affect more than 65 million members of Generations X and Y, delaying or preventing them from assuming other forms of debt (specifically mortgages), investing, and purchasing discretionary and durable goods because they’ll have spent most of their first decade in the workplace paying off student loans while, at the same time, addressing traditional financial burdens like car payments and their first years out on their own.

Once they finally want to pursue a home or bigger purchases, their ability to do so will be somewhat constricted as they come of child bearing age (at least by today’s standards). Due to college, lower incomes and the accompanying need for dual-income households, more and more first-time parents are taking on that task in their 30s and the number of first-time mothers over the age of 35 has grown eightfold since 1970.

In essence, Generations X and Y are a decade behind their predecessors when it comes to the fulfillment of their American Dream; a decade behind in their ability to spend, raise a family and invest in their future. It’s a lost decade they’ll never be able to overcome later in life, forcing them to be a decade behind in retirement, too: Today’s younger generations can plan on working well into their 70s. Then, thanks to lower earning potential, their nest eggs will be smaller and, therefore, the quality of life in their golden years will be nothing like that experienced by current retirees.

This is all a little disconcerting. It makes one wonder if America’s expansion has finally hit a wall and we’re settling into a long period of slow growth, if not stagnancy. Generations X and Y will have to figure that out and hopefully turn things around. But, as you’ll read next week, other factors are in play that will place significant obstacles in their path.

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