The new financial future needs to cut young workers a break

Pat Garofalo points out the perils of financially-stressed young workers getting buried in debt — before they even enter the work force.

Last week, Johnathan Shafter wrote here that progressives must “undertake a wide, integrated rethinking of our institutions for long-term household savings and social insurance. Families must be given an option whereby they can reasonably plan on a secure, adequate retirement if they do the right thing and responsibly save over their working lives.” This is a key topic to tackle going forward, as we pick up the pieces of a business expansion that was built largely on debt, and as many families begin to rebuild savings destroyed by a market plunge, if not by outright financial chicanery.

But in order to build a country in which savings and a secure retirement are taken seriously, we need to have a system that puts young workers onto a savings-based path early, which our current system certainly does not. According to a new study by Peter Hart Associates, more than half of young workers (those under 35) do not have a retirement plan at work. This is a ten-point increase over ten years ago.

In addition, more than two-thirds of young workers do not make enough money to both pay their bills and put some money aside. Due to a combination of rising costs, deteriorating wages, and the economic recession, one in three young workers is now living at home.

In addition to lacking a viable path toward savings, young people are burying themselves in debt before they even enter the workforce, particularly to pay for a college education — an education that increasingly means less and less in terms of wages. As Michael Mandel at Economics Unbound pointed out, “College costs are up by 23 percent since 2000. But real pay for young college grads is down 11% over the same period.”

Two-thirds of today’s college students borrow to pay for tuition, and their average debt load is $23,186, according to an analysis of the government’s National Postsecondary Student Aid Study. Twelve years ago, 58 percent of students borrowed to pay for college, and the average amount borrowed was $13,172.

And it’s not only loans that are saddling young people with debt. Graduates in 2008 carried an average of $4,100 in credit card debt in 2008, up from $2,900 four years earlier. Meanwhile, young workers have been hit harder than any other age group by the great recession, and companies expect to hire 22 percent fewer people from the class of 2009 than they hired from the class of 2008.

This set of facts leads down two different paths, both of which are critical to ensuring that today’s young workers can build up savings and get on a fiscally sustainable path. The first is controlling the rising cost of education and ensuring that young people don’t have to bury themselves in debt before they even set out into the workforce. The Obama administration has proposed some common sense student loan reforms that will lower the cost of borrowing and expand access to Pell Grants, but that won’t amount to much unless colleges administrators themselves can find a way to contain tuition that consistently increases faster than the rate of inflation, which they have not been able to do with any degree of success.

The second is ensuring a path to a fair retirement plan for young workers, and the best way to do that is to guarantee that they have representation in the workplace. As the Center for Economic and Policy Research found, young workers with union representation are about 24 percentage points more likely to have a pension plan than similar non-union workers. In low-income occupations, young unionized workers are 26 percent more likely to have a pension. And it should come as no surprise that wages have been stagnant for three decades, when only seven and a half percent of the private-sector workforce is unionized, down from 40 percent in the 1950s.

Wall Street malfeasance played an outsized role in the financial crash, but a small modicum of responsibility does fall on households that used their homes as ATMs, banking on a bubble that few were willing to acknowledge, lest their exuberance be reined in. As we cobble the pieces of the economy back together, building a more sustainable system that encourages safe, fruitful methods of saving will help to gird families against the next Wall Street bust.

Pat Garofalo is an Economics Researcher/Blogger for The Wonk Room and The Progress Report at the Center for American Progress Action Fund.