The young and investment-less
Recent polling shows a big majority of Americans think it will be more difficult for this generation of millennials to achieve the American Dream of climbing the economic ladder.
That’s probably way too much pessimism, but what is troubling is the early indicators of how young people are faring in the economy and what they are doing with their money.
The first bad sign is that fewer young people between 18 and 24 are working. The labor force participation rate for this age group is now near a 50-year low, at 65 percent. If you’re 22 and not working, you are dependent, not independent. Just over half of 18- to 23-year-olds live with their parents. Will they ever leave home?
The second troubling trend is that the young aren’t investing. The latest data from the Federal Reserve indicate that a modern record-low 7 percent of households headed by those under 35 years old directly own stock. That’s pitiful — especially considering this figure was more than four times higher — at 30 percent — when the survey was first conducted in 1963.
Actually, stock market participation fell for nearly every age group during the past decade (see chart). This is sadly ironic because since 2008, the stock market indexes have more than doubled. People began to sell in the 2008 panic and they haven’t stuck their toes back in the water since. They bought high and sold low.
But for the young, investing should never be about timing the market. It’s about riding the upward wave of U.S. stocks over a lifetime. Investment guru Jeremy Siegel calls this “stocks for the long run,” and his book teaches us that this is the single best way to build wealth and capital over time.
The single best time to invest is at a young age because the dollar in the market today will likely be worth 10 to 50 times that much, after inflation, by the time you reach age 65. The average real rate of return of stocks since the late-19th century has been 6 percent — which would make $1 invested at age 18 worth more than $15 at age 65. With a real return of 9 percent per year, each $1 grows to more than $50 during those 47 years. Despite depressions, recessions and wars, stocks rise over time; and the market investor wisely taps into what Albert Einstein is purported to have once called the “most powerful force in the universe: compound interest.”
Why aren’t they doing this? One reason is the lingering psychological trauma of the 2001 tech and 2008 broad market collapses. Another problem is they are overloaded with debt from student loans so they can’t save — they can only pay off debt.
Perhaps the biggest problem for young workers is that the government intercepts more than 12 percent of their paychecks through the Federal Insurance Contributions Act (FICA) payroll tax. After paying these taxes, many don’t have much disposable income left to invest after paying for the necessities. Worse, the young get no rate of return on that money because the government spends it when it gets it.
Economist Peter Ferrara of the Heartland Institute argues in his new book, “Power to the People,” that the average-income young American would have a nest egg of well over $1 million if they invested their payroll tax dollars in an index fund of all stocks. There would be no retirement crisis for the millennials — there would be a retirement bonanza.
He shows that the average two-earner household earns about 1 percent per year on the FICA taxes they pay given the benefits they are scheduled to receive.
A lifetime single worker really gets a horrid deal from Social Security. The return on average is less than 0.5 percent. These workers would be nearly better off stuffing their payroll tax dollars under a mattress.
America should be about owning a piece of the rock, about letting every worker have equity and share in the returns to capital. The new line by the left is that equity returns rise faster than wages. OK, let the poor and middle-class workers own more equities.
If only the majority of the wealthiest top 10 percent of Americans own stock directly — which does not include pension and retirement accounts — then the divide between rich and poor is likely to expand. Economist David Malpass points out in a recent wealth analysis that the value of all U.S. household assets is $99 trillion, up more than 5 percent over the last year. But he also finds that “most of this wealth is concentrated with the wealthy” and that is in part because the middle class and young have dropped out of the market.
We want everyone in America to be a worker-owner. This is how to create a shared prosperity. This matters most for the millennials because they have half a century of future returns to tap into. The wise ones will get started immediately by setting aside $100 a month for investing in their and America’s future.
- Stephen Moore is a Fox News contributor and author of “Who’s the Fairest of Them All? The Truth About Taxes, Income and Wealth in America” (Encounter Books, 2012).
Originally appeared in the Washington Times