Part 2 - In depth: How financial inequality is turning millennials into "snowflakes"
Jul 31, 2019
Erik Fertsman
It turns out millennials are not earning more than their older peers, they have less wealth built up in assets when compared to Boomers at the same age, and their debt-to-income ratios are sky high. To make matters worse, a smaller segment of millennials are pulling away from the rest of the pack because they are homeowners. As a result, inequality in this group is twice as bad as the inequality Gen X is experiencing.
Previously, we explored how low home ownership rates among millennials is forcing many of them into a precarious situation. Equifax has identified some profound trends, and Stats Can data demonstrates the degree to which millennials are behind the pack in terms of their share of property ownership. If you didn't catch this, head over to
part 1 of this deep dive into why millennials are struggling during a period of low unemployment and prolonged and oft-touted economic expansion.
Over the last few decades, income inequality has been an obsession among pundits, academics, politicians and activists. It's true that wages have been stagnant for too long, and that rising prices on things is making this more and more evident as time goes by. Just a few days ago I wrote
about the stark difference between the growth rate of wages and the growth rate of home prices in Canada. This is a very serious problem, and one that I have yet to see explored in any depth or seriousness beyond the digital confines of this website. The situation reminds me of frogs in boiling water; they just don't feel the heat until it's too late.
However, we can bring the discussion to a whole new level - one that is much more profound and comprehensive. Rather than just narrowing in on income inequality, we should talk about financial inequality, that is, differences in the accumulation of assets (worth something if sold) between individuals within and beyond specific demographics. Why is this important? There's a close association between the ability to accumulate assets and financial well-being, as we observed in part 1 of this article. We know that there's a disproportional amount of home property ownership in the hands of older generations. Millennials, on the other hand, are unable to leverage certain financial products and strategies that enable them to live a life-style comparable to older folks.
So, here's a few more ways we can slice the pie and fine-tune our perspective on all of this.
What Statistics Canada found about the economic well-being of millennials
Previously we took a look at Stats Can's Canadian Housing Statistics Program for insight and clues. But, Stats Can also released some other publications with goodies we can look at.
Using data from the Canadian Income Survey and the Survey of Financial Security, they did a study
on economic well-being among millennials, asking the following questions:
- Are millennial households better or worse off than previous generations at the same age in terms of income levels, debts, assets and net worth?
- Are some millennial households, such as those with lower levels of educational attainment or who did not invest in the housing market, being left behind in terms of building wealth?
Of course, it's probably wise to take a look at what they mean by "economic well-being." Stats Can defines
it as "the ability of households to meet their needs, to accumulate assets and build wealth." They know from previous data, just like Equifax, that home ownership has something to do with financial or economic well-bring. Here's what they found:
Household after-tax income is starting higher for millennials, but it's still below the pack
In part 1, we assumed millennials are probably earning more than previous generations did at the same age. It turns out that this is true, albeit with some important caveats. Check out this chart below:
Even though millennials have paid and are paying more for pretty everything, on average, they are not making more than Gen X and Boomers.
Even though they're starting from a higher place in terms of their level of education, it's only taking them so far at the start. You have to remember that millennials as a group are more educated, and they have higher levels of student debts. They certainly paid more for tuition per year than their parents. But they might not be earning enough to cover the sums of money that they forked out for those pieces of paper.
We don't have enough space here to untangle whether taxation is an issue, but the overall trend is clear: millennials are starting off at a higher place, but they are not making more or the same wage as older folks. This is likely contributing to slower student debt re-payments, and delaying home ownership as a result.
Asset value and net worth is starting higher than Gen X, but it's below Boomers and older generations at the same age
Two more vital characteristics to compare between generations are asset value and net worth (assets minus debts). Here's the data from Stats Can:
Millennials are starting off just slightly above Gen X (likely their parents). One thing to note though, is that Gen X didn't necessarily start better off than their own parents, so the trends here are clearly inter-generational. As you can see, the orange line started off (and still is) lower than the darker blue line in both assets and net worth. I wouldn't be surprised to see many millennials dependent in some way on their grand parents, then!
The single biggest contributor to net worth is a person's home... because real estate makes up such a huge chunk of the Canadian economic pie. You have to recall that the data above is just the average, and if we were to separate the data into percentiles (top 10%, bottom 20%, etc.) we would see much lower levels. In reality, most millennials are probably starting off with a net worth closer to zero, or even in the negative.
Debt-to-income (after taxes) is super high for millennials when compared to previous generations
OK, here's where things take a really bad turn. The chart below contains the data on debt-to-income across generations and age, adjusted for taxation. Take a look:
What's really shocking is the severity or gap of the debt-to-after tax income between millennials and Gen X... it's nearly double! This kind of spread didn't start with millennials, though, as you can see there's a pretty big one between Gen X and Boomers at the same age.
The real perplexing bit comes when you look at how the line slopes get steeper with each subsequent generation. Baby boomers had about a 30 degree slope as their debt-to-income levels have risen over the last 30-40 years. Meanwhile, Gen X has a full-blown 45 degree angle. What will millennials experience? 75 degrees!? This is absolute mad.
In just under 25 years, Gen X has managed to double their debt-to-income ratios. And it's not really a surprise, because as I've shown in a previous post, wages have not kept up with asset price inflation. For things like homes, you've had 10-15 percent year-over-year growth rates. But wages have barely made it past 5 percent, and have frequently and regularly dipped into negative growth rates.
The end result? Extreme financial inequality when measured by net worth and across financial indicators
Now, to really scale the results, Stats Can has provided a wonderful dataset. I've only included two generations here, but this is what the inequality looks like when you visually graph it... and I've had to put it into logarithmic scale:
So, unlike the previous graphs I've shown you, the one directly above has an equal percentage change along the vertical axis. This means that each dot is separated by an equal rate of change. You have the bottom 10 percent with nothing (actually this data is negative, but it had to be omitted).
The bottom 25 percent of millennials have a higher inequality in their net worth than Gen X, and the trend stays intact the higher up the percentile ladder you go. Financial inequality at the top for millennials is more than double that of Gen X! Go ahead, drag your finger or cursor over the interactive chart above to reveal the dollar values.
If you're still wondering what all of this comes down to, take a peak at the following chart:
As you can see, having a higher asset value really depends on holding a "principal residence asset." Of course, this means you probably have more debt - and by extension, possibly a lower credit rating - but it really gives your net worth a boost because of the asset price inflation that one ends up benefiting from over time. Don't get it wrong, having a principal residence asset also likely means you have a higher after-tax income, so having a home is not the sole consideration.
Home ownership is expensive and requires a certain amount of cash flow. So the stats show us that home owners are earning more to be able to afford those mortgage or home monthly costs and payments. This is another reason why wages need to get bolstered, otherwise we're only making matters worse for millennials and the financial inequality they face with rising home prices and stagnant wages.
If only we could get this message out to Ottawa and provincial leaders... but they're more preoccupied with providing already over-indebted and low paid Canadians with principal and interest free programs, just like the Liberal government's First-time Home Buyer Incentive slated to go live right before the October election this year. Go on, check it out.
Cover image source: Annie Spratt
SHARE THIS ARTICLE
Enjoyed this article and want to support our work, but are using an ad blocker? Consider disabling your ad blocker for this website and/or tip a few satoshi to the address below. Your support is greatly appreciated.
BTC Address: 13XtSgQmU633rJsN1gtMBkvDFLCEBnimJX
Most Recent
