Another Day Younger And Deeper In Debt

September 16, 2015 | By Neil Howe

This editorial originally appeared in Forbes.

recent report from Pew Charitable Trusts that examines debt within each generation finds that as you move down the age ladder, consumers are less likely to view debt in positive terms. Members of the Silent Generation (today mainly in their late 70s and 80s), who have accrued so much wealth that their debt is but a blip on the radar, believe debt to be opportunity-enhancing. Boomers are more conflicted, as they’re just beginning to realize that their lavish spending is catching up with them. Younger generations have the most negative attitudes toward debt: Generation Xers played it risky at exactly the wrong time, while Millennials who watch their elders struggle to escape the creditor want to avoid debt at all costs.

Average household debt, though below pre-Great Recession levels, is much higher than it was three decades ago no matter how you measure it. According to the Federal Reserve’s Survey of Consumer Finances, after adjusting for inflation, the amount of debt held by the average family nearly doubled from $47,356 in 1989 to $91,114 in 2013—with the largest dollar share of that growth belonging to mortgage debt. Additionally, household debt as a share of GDP has increased by roughly 20 percentage points over that same time period, from around 60% in 1989 to just above 80% in 2013.

Average Net Worth and Composition of Assets and Liabilities of the Middle 60 Percent of the Wealth Distribution by Select 10-Year Age Groupings (1989 and 2013)

Average Net Worth and Composition of Assets and Liabilities of the Middle 60 Percent of the Wealth Distribution by Select 10-Year Age Groupings (1989 and 2013)

How indebted is each of today’s generations? Fed data indicate that the Silent are the least burdened. The average 75+ household had just $23,805 in total debt in 2013, the least of any age bracket. The next best-off are Millennials: The average under-35 household owes $63,608. Of course, this generation has overseen the explosion in student loan debt—holding 25% more in these loans than any other age group. In fact, the growth of student loan burdens has suppressed all other forms of debt: Among under-35 households, every type of debt except student loans is smaller than it was for Xers at the same age, causing many Millennials to put off big-ticket purchases like cars or houses.

But the picture looks far worse for middle-aged adults. Among adults ages 65 to 74—a mostly first-wave Boomer age bracket—average household debt is $72,718. For those ages ages 55 to 64, that figure rises to $103,805. Xers are the worst off. First-wavers, ages 45 to 54, have anaverage household debt of $123,862 (mortgage debt of $96,863)—and for last-wavers, ages 35 to 44, the figure is $129,235 (mortgage debt of $91,909).

It’s not surprising that generations in different life stages have varying degrees of indebtedness. A more illuminating way to evaluate change over time is to compare each age bracket today with the same one 25 years ago.

According to Fed data, the Silent Generation shows the biggest improvement compared to people their age back in 1989. Though the average 70- to 79-year-old household in 2013 had over $34,000 in debt (compared to just $6,000 in 1989), a Silent household also had $100,000 more in assets than a like-aged household in 1989. Among first-wave Boomers, debt has risen much faster: Thanks to home-equity borrowing, today’s 60- to 69-year-old Boomer household has $60,000 more debt than a like-aged household in 1989. But since these Boomers also possess $130,000 more in assets, there is no real cause for alarm.

Among younger cohorts today under age 60, however, we begin to see an increase in debt without a significant increase in assets. For example, 40- to 49-year-olds in 2013 not only had more debt than like-aged individuals in 1989, but also had a full $25,000 fewer assets—making this mid-Xer bracket the only one to have fewer assets than the same age group 25 years prior. In 2013, a head of household younger than 35 picked up roughly $17,000 more debt—but only accrued $2,410 more in assets.

This changing pattern of debt behavior is linked to—and explains—how different generations perceive debt. Unsurprisingly, fully 77% of Silent believe that loans and credit cards have expanded their opportunities and are worth the inherent risk. Because the Silent were in their prime earning years when there were limited ways to go into debt (other than falling behind on mortgage and car payments), few have experienced over-indebtedness—and even when they did, their upward economic mobility relative to other generations bailed them out.

Most Boomers (70%) also recognize debt’s advantages. Boomers know that without loans and credit cards, they could never have financed the McMansions, BMWs, or pricey home renovations that underlie their chosen lifestyles. But an unprecedented share of the generation that pioneered the home equity loan will be paying off their mortgages until the day they die, all but killing the once-ritualistic mortgage-burning party. As this generation ages, their children will need assistance coping with the heavily indebted homes and assets they inherit.

Xers are a different story: Only 63% realize the value of debt. Xers view banks as an all-too-tempting way to convert future income into current consumption, which led vast numbers of over-leveraged 30- and 40-somethings to financial ruin after the Great Recession. This generation took on heavy debt in a risky attempt to “keep up” with Boomers’ lavish spending—a living example of James Duesenberry’s relative income hypothesis. For Xers, banks were never the trusty Roman-columned institutions that tried to help them live better lives, but instead seductive Web-based come-ons for low-doc, no-down-payment bubble loans they couldn’t possibly afford.

Millennials, according to Pew’s study, are the least likely (62%) to see loans and credit cards as opportunity-enhancing. Risk-averse Millennials saw what happened to their elders’ balance sheets during the recession and many are staying as far away from banks as possible, opting for prepaid debit cards instead of credit cards.

It’s too early to tell, however, how Millennials will collect debt relative to older generations. Whether they will spend heavily to keep up with their parents’ standard—or whether they will keep their risk aversion, embracing a “new normal” of smaller mortgages and lower spending—remains to be seen.