Why Your Kids Won't Own a Bigger House Than You

SAN DIEGO (MainStreet)—Children are typically richer than their parents, with each successive generation richer than the previous one. At least that's been the economic pattern, as society has gotten wealthier, up until recently.

But for members of Generation X and Generation Y, something has gone off track.

According to a recently issued report from the Urban Institute called "Lost Generations? Wealth Building Among Young Americans," Generation X and Generation Y have accumulated less wealth than their parents did at their age, a quarter century ago.

The average wealth in 2010 of twenty- and thirty-somethings was 7% below the wealth of those who were in their '20s and '30s in 1983.

"We didn't expect to see this at all," says Signe-Mary McKernan, one of four authors of the report. "There is this expectation that every generation does better than the previous generation. This is some of the first evidence we've seen of a lost generation and loss of wealth. And lost wealth is so important, because it's where economic opportunity lies. It's that insurance against tough times. And wealth disparities are passed from generation to generation."

So what's behind this massive loss of wealth accumulation?

Even before the Great Recession, younger Americans were on a different trajectory for several reasons:

  • Stagnant wages
  • Diminishing job opportunities
  • Lost home values

"I think they got caught up in housing market," continues McKernan."They were poorer or had lower wealth before the Great Recession. They were the new homeowners and most recent buyers. They most likely bought houses when the prices were highest and suffered the greatest losses."

The various economic changes affecting the two generations are merging to paint a far different future for them, according to the report.

What's more, despite their youth, it's not clear that either generation will be able to make up the lost economic ground, which will impact the rest of society – because they will be less able to support themselves upon retirement.

It also means they will not likely be able to retire at the median retirement age of 64.

"People are expecting to work longer and longer," McKernan says.

And there are other side effects of the lost wealth among the two generations including an impact on entrepreneurial activity and investments.

The current economic situation in the United States is not helping either. According to the report, the country's budget crisis and public debt burden loom large and the younger generation could be facing much higher tax bills than that of their parents.

McKernan advocates automatic savings vehicles for the two generations as a way to help climb out of this wealth-building crisis. She says saving even 2% of one's weekly income can help.

She also says changes in federal tax policy could help ease this dire situation, that there should be more focus in the tax code on wealth building among younger households.

"There's billions of dollars in subsidies," McKernan says of the tax code. "Make those benefit lower income and young people."

But ultimately, if nothing changes, it's not just the twenty- or thirty-somethings who suffer.

"This has implications for the overall health of economy because financial difficulties and uncertainty weaken the economy," McKernan says. "And if the young aren't able to catch up, then they are less able to support themselves when they retire. They may be more dependent on safety net programs. So now we're talking about a need for Social Security, but a greater need for it for this younger generation."

--Written by Mia Taylor for MainStreet

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