Wealth building ‘harder for young adults today’

Wealth building for the future is ‘harder for today’s young adults,’ say researchers who offer fresh evidence of a growing intergenerational divide in Britain.

A new report from the Institute of Fiscal Studies (IFS) shows Brits born in the early 1980s have about half the wealth that those born in the early 1970s enjoyed at around the same age.

The analysis finds Brits currently in their early 30s have a median net household wealth of £27,000 per adult.

In contrast, those born just a decade earlier, had nearly double this median wealth – around £53,000 – when they were in their early 30s.

wealth buildingThe report finds Brits in their early 30s have half the wealth enjoyed by those at same age a decade ago.

The analysis takes into account housing, financial, and private pension wealth.

Andrew Hood, an IFS research economist and co-author of the report, says:

“Sharp falls in home-ownership rates and in access to generous company pension schemes, alongside historically low interest rates, will make it much harder for today’s young adults to build up wealth in future than it was for previous generations.”

Income stagnation

The report shows Brits born in the early 1980s are the first post-war group not to earn more in early adulthood than those born a decade before them.

The authors suggest while some of this is a result of overall stagnation of working-age incomes, it is also due to the fact young adults took the hardest hit on pay and employment in the Great Recession.

Normally, as the economy grows, each generation has a higher income than the one born a decade earlier.

For instance, by the time they reached age 50, people born in the 1950s had an average median household income around 20 percent higher than those born in the 1940s.

This was also the case for those born in the 1940s compared with those born in the 1930s.

But this growth plateaus around the 1960s generation. Those now in their early 50s have no higher incomes than those born in the 1950s did when they were the same age.

The IFS authors say this reflects the stagnation of working-age incomes over the past 10 years.

Between 1994-1995 and 2004-2005, real median income for those aged 25-55 grew 26 percent. The decade after that – from 2004-2005 to 2014-2015 – it grew by only 2 percent.

Decline in home ownership

A feature that stands out when looking at wealth building capacity in post-war generations, is the decline in home ownership in early adulthood.

Only around 40 percent of those born in the early 1980s were homeowners at the age of 30, compared with over 60 percent of those born in the 1950s and 1960s at the same age.

“The last cohort to have a similar home ownership rate to those born in the early 1980s at the same age was the 1930s cohort,” note the authors.

The decline in home ownership has been accompanied by a growing divergence in housing costs between those who rent and those who own their home.

Between the ages of 26 and 30, renters born in the early 1980s spent 28 percent of their income on housing, compared with 15 percent for home owners.

In contrast, renters and home owners born in the 1960s both spent around 20 percent of their income on housing, at the same age.

The IFS note that differences in the economic circumstances of different generations, and the part that government has played in making things worse or better, have become more prominent in recent years.

In her first statement as Prime Minister in July, Theresa May counted the fact that, “If you’re young, you’ll find it harder than ever before to own your own home,” among several “burning injustices” her new government would be tackling.

Decline in defined benefit pensions

The IFS also suggest the decline in defined benefit pensions – such as final salary schemes – has reduced wealth building capacity for those born since the 1970s who are not employed in the public sector.

Their report says around 40 percent of people born in the 1960s who worked in the private sector were active members of a defined benefit pension scheme.

But since then, the figure has fallen to less than 10 percent for those born in the early 1980s.

There has been partial redress, in that recent changes mean employees are now automatically enrolled into defined contribution pensions schemes, resulting in more young adults than ever before joining pension schemes.

However, the shift from defined benefit to defined contribution schemes is linked with “a large reduction in the generosity of employer contributions” and puts more risk onto employees, says the report.

The IFS note that the UK Parliament’s Work and Pensions Select Committee is currently conducting an inquiry into “intergenerational fairness.”