Young and in debt

Credit cards
“Blessed are the young, for they shall inherit the national debt”
– Herbert Hoover

Today’s younger generation may well be discovering the truth of Hoover’s remarks as they adjust to living with the consequences of the 2008 banking crisis. Millennials – typically defined as those born between the 1980s and early 2000s – face lower levels of real income than previous generations. They work in an environment in which earnings are lagging behind inflation. And, with the rise of the ‘gig’ economy and zero-hours contracts, these earnings are often less predictable.

In a recent interview with the BBC, the CEO of the Financial Conduct Authority (FCA) highlighted the issue of growing credit card debt among young people. In particular, the use of credit cards to manage essential household spending such as food. Statistics gathered last year by the charity, Money Advice Trust, corroborate the FCA’s concerns as they found that 37% of 18-24 year olds were in debt, excluding the impact of student loans.

Citizens Advice says there has been a 34% rise in the past two years in the number of under-25s seeking help with high-cost credit – including payday loans, rent-to-own loans, overdrafts and catalogue credit. Unsecured household debt in Britain, including credit cards, overdrafts and car loans, recently topped £200 billion for the first time since the autumn of 2008.

The ready availability of credit, coupled with a squeeze in wages, has led young adults to embrace credit to buy day-to-day essentials.

Levels of personal asset ownership are declining

The ready availability of credit, coupled with a squeeze in wages, has led young adults to embrace credit to buy day-to-day essentials. According to research conducted by accountants PWC, one in five 25-to-34 year olds admitted to turning to credit for this purpose, compared with 6% of the over-55s. The young are experiencing increasing student debt pressures as education tuition fees increase as well as the interest paid on them, along with the combination of a fall in real earnings of over 10% for 22-39 year olds.

Levels of asset ownership are generally significantly lower, too. Owning a home used to be part of the route to adulthood in the UK. For young people now though, the prospect of home ownership has drifted further and further away since the financial crisis of 2008.

An ONS report on housing affordability in 2016, revealed that on average, working people could expect to pay around 7.6 times their annual earnings for a home compared to 3.6 times in 1997. As house price inflation has significantly out-paced wage inflation over the same period, it’s no wonder that the younger generation are renting. This, in turn, has had a knock-on effect on demand for rental property and pushed up rental prices dramatically. Data produced in 2016 by the Money Advice Trust revealed that the cost of renting a one-bedroom property has risen so high that young people are paying up to half of their take home pay on rent.

The generation gap

For the last ten years, a generation of younger people have lived in a low inflation, low growth and low interest rate economy which offers them little incentive to save or acquire assets. Even the outlook for their pensions has changed compared to their parents as defined benefits schemes have given way to defined contributions. Last month’s news that the inflation rate had risen to 3% means the state pension is guaranteed to increase by that amount – only adding to the gap between the generations.

Encouraging a savings and home ownership culture in a generation which has indeed inherited the national debt and struggles to own assets is a worrying trend for capitalism. There are signs that the government recognise the need to address issues like student loans and managing problem debt. In a world where amassing debt is so much easier than amassing capital, politicians need to find solutions or the generation gap may only widen.


The article above was previously published on Aberdeen Asset Management’s ‘Thinking Aloud’ blog on 2nd November 2017