New Study Highlights Why Millennials Are Not Saving Enough

For years now there has been a clash between two positions on why millennials struggle to build wealth in the same way as previous generations. On the one side of the debate is the accusation that the reason why millennials struggle to get on the property ladder and save for the future is that they prioritise consumer culture and spend all of their money on Eggs Benedict and salmon brunches and AirPods.

The counter argument is that millennials are able to spend money on consumer goods and services because they have become relatively cheaper, and mass market accessible, over the years. But on the flipside the relative cost of property and fixed expenses such as transport compared to wages has increased. So while the average young professional has more access to a wider range and higher quality of consumer goods and services than their parents and grandparents, the kind of saving and spending that allowed previous generations to accumulate wealth they are now able to enjoy in their later years is less accessible to today’s 20 and 30-somethings.

A new study released this week by the Institute for Fiscal Studies has added support to the latter position. The research, led by IFS associate director Rowena Crawford and research economist David Sturrock supports the conclusion that the inability of millennials to build long term wealth is less of a lifestyle choice than one dictated by contemporary conditions. As such, the report concludes that it may not be appropriate to judge the current generation against the benchmark of those that came before them.

The research found that the last generation that can be shown to have accumulated more wealth than their parents is that born in the 1950s. Following generations roughly matched the wealth-building patterns and success of the one before it. The report states:

“There is a question about whether stalling wealth accumulation represents a failure by younger generations to save enough. One claim is that young people are prioritising the present, spending too much on the much-mocked avocado toast, for example, and not saving enough for their future.”

Previous generations benefitted from a combination of soaring property prices, which were still low enough, comparative to wages, to allow them to get on the property ladder in the first place. Saving for a deposit decades ago was partly helped by much higher interest rates on savings accounts. While property prices have risen to negate any real gain from lower interest rates, the same can’t be said of savings. Interests have been so low for a decade that millennials have had no real incentive to save in the same way as previous generations. Slower wage growth and record low interest rates have combined to make it harder to save out of income and low interest rates mean savings grow slowly.

The report also suggests that the stock market gains of the 1980s that older generations benefited from are unlikely to be repeated. However, while future stock market gains are hard to predict, the reality is that the last ten years since the financial crisis have seen stock markets gain significantly. That suggests there is still a good argument why millennials who do want to succeed in building wealth despite arguably tougher conditions than their parents faced need to be more proactive and invest rather than keep their money in the bank at interest rates running below inflation.

Slowing growth in productivity is put forward by the report as a reason why it is tougher for the millennial generation to accumulate wealth. But the productivity gains that new generations of companies across technology, biotechnology and other cutting edge sectors or new business models are offering shows there is still hope for the future. And investing in stock markets and the companies driving these new productivity gains is surely one way millennials can hope to accumulate wealth.

So maybe the truth is somewhere in the middle. Yes, in many ways it may be harder for millennials to accumulate wealth in the same way their parents and grandparents did so. But that doesn’t mean there aren’t other ways. Saving at interest rates that mean wealth is chipped away at over time might no longer hold much attraction. But investing still should.