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The Actuary The magazine of the Institute & Faculty of Actuaries

Economics: Generation Y

The existing financial crisis will only be resolved by a group of people who are more concerned about the contents of their iPods. Changing demographics is a primary driver for economic patterns influencing spending and wealth accumulation. The solution to the current financial turmoil lies with its silent victims. What happens over the course of the next five years is dependent on the response of a generation already addicted to debt.

Throughout the Second World War, UK birth rates collapsed and then dramatically increased immediately following the end of the war. The temporarily dampened birth rates resulted in a population wave that rippled through time leaving three distinct post-war generations in its wake:

>> The Baby Boomers (born between 1946 and 1960) — children of those who served during WWII and currently at the peak of their social influence.

>> Generation X (born between 1960 and 1975) — those born during a recession. Generation X is often referred to as the ‘trapped generation’.

>> Generation Y (those born between 1975 and 1990) — children of the Baby Boomers and who are becoming today’s junior managers.

Relative size of the generations is a subjective measure and dependent on how each is defined. However, some suggest that Generation Y is as large as the Baby Boomers, with Generation X being as little as just 20% of the Baby Boomer population. The relative mass of each generation provides social impetus and influence on commerce and politics. The competing gravity of the two largest generations, coupled with Generation X’s renowned cynicism, will result in the rapid change of focus from the Baby Boomers to move almost directly to Generation Y.

Social influence
Individuals are influenced by the economic and social climate throughout their lifetime. These influences impact a person’s attitude to employment, relationships and personal finances. To understand Generation Y, and in comparison to the Baby Boomers, it is important to consider the environment in which each generation matures.

Figure 1 shows summary economic data from the end of WWII over the period 1947 to 2007. The following comments can be made about the UK during that time:

>> Household and national wealth has increased considerably over the past 60 years.

>> There have been three distinct recessions: the early 1970s, the late 1980s and finally the late 1990s. Associated with each recession are marked increases in interest rates, inflation and lagged spikes in unemployment, all contributing to challenging social and economic conditions.

>> Baby Boomers and Generation X, in particular, have been affected by periods of uncertain economic activity at critical lifestyle development ages (ages 18-25). It is this that is attributed to Generation X’s cynical outlook. On the other hand, Generation Y has grown up during an exceptional period of low interest rates and cost inflation with unprecedented asset price inflation.

In addition, social influences have shaped each generation, and this has never been more evident than with Generation Y. The popularity of two full-time employed parents has resulted in the UK’s increased wealth being concentrated in ever-smaller families. Generation Y has enjoyed privileged access to a parental financial safety net on a scale not seen before. It is this combination of historical economic events, social evolution and inopportune timing that now means Generation Y will become the silent victims of the credit crunch. There are fundamental differences in attitudes between the Baby Boomers and Generation Y, which offer the Baby Boomers the potential to undermine the long-term financial stability of the UK economy.

Generation Y is a group of young adults whose financial attitudes are forged out of cheap debt and easy credit. It also considers debt in relation to historically low level interest rates, and struggles to translate its borrowings into an economic environment witnessed by its parents. As mentioned, Generation Y has access to safeguards and ‘a lender of last resort’. Given this, it is not surprising that a recent building society survey indicates the vast majority of Generation Y who have access to credit, are indeed in personal debt. These conditions encourage a culture of reckless borrowing, and it is this attitude to debt that may have helped fuel unsustainable increases in consumption when considered against a more pessimistic economic outlook.

Too little, too late
Generation Y is ill-equipped to understand the extent of the current financial turmoil and its potential implications. The Financial Services Authority’s response to widespread financial illiteracy will prove too little, too late, with the Money Guidance Pathfinder only in pilot stage and little other initiatives for public education. This financial illiteracy, coupled with extensive borrowing, leaves Generation Y particularly exposed to a recession that it is unable to articulate, as it does not occupy sufficiently senior roles in the public or private sectors.

The Baby Boomers will also be exposed to the aftermath of the credit crunch and strive to protect their own financial wellbeing. Dramatic falls in the stock market have eroded the value of savings and pensions held by Baby Boomers and for some this has happened at a pivotal moment in which they move to a position of asset decumulation. Other assets held outside financial institutions, most notably property, have suffered a fall in value after years of high growth. Arguably, and ironically, growth in property value has been fuelled by Generation Y’s determination to own their first homes, financed through high borrowing ratios. In contrast to Generation Y’s position of weakness, their parents enjoy a position of dominance, allowing them to take steps to avert the erosion of their personal wealth.

Any fiscal policy, to avert recession or otherwise, is subject to public checks and controls. These controls can be of several forms: parliamentary oversight, independent watchdogs, preservation of political capital or general public interest via the media. It is worth noting that all sources of current oversight are led by members of the Baby Boomer generation, simply through their seniority in management roles. Generation Y is further hampered by two factors: means of communication and political apathy. Generation Y interacts with the world in a different fashion from the Baby Boomers. It depends on new means of communication (social networking, the internet and mobile telecommunications) and is less reliant on traditional means of communication (print and television). Generation Y is more cynical towards politicians and less inclined to vote, again through growing up in a period of prosperity, and not polarised by historical political events. The two characteristics coupled together have the potential result that Generation Y’s views are not heard or represented by government.

The dilemma is clear: Baby Boomers must strive to limit the potential economic downside, and in doing so will protect their existing assets, without inadvertently burdening Generation Y with unmanageable levels of debt and compromising longterm economic recovery. A careful balance must be struck to allow some asset price bubbles to deflate and establish sustainable long-term growth whilst preventing a deep recession. The Baby Boomers must resist the temptation to protect their own short-term interests at the expense of Generation Y in the presence of a lack of oversight. It may be that an already overstretched Generation Y is left footing the bill to any planned rescue package following Baby-Boomer-led initiatives to maintain current asset prices.

The response of the UK authorities to the current financial crisis is to increase public borrowing to fund existing spending levels. The actuarial profession is in a pre-eminent position to quantify and understand the long-term implications of debt financing with respect to ageing generations. Furthermore, this long-term perspective is of paramount importance as the balance of benefactors is likely to straddle the working lifetimes of the Baby Boomers and their retirement. Generational financial development is a pillar of treating customers fairly, which must be extended well beyond the customers of an insurance company.

Further information

>> A political think-tank, Reform, labelled Generation Y as the IPOD Generation (Insecure, Pressurised, Over-taxed and Debt-ridden). www.reform.co.uk

>> A report by the Skipton Building Society found that 73% of people under the age of 35 in Yorkshire have some form of debt, with the average person owing £8477 and their biggest monthly expense on average, other than rent or mortgage payment, was servicing debt. www.skipton.com/press_office/publicitycampaigns/the_tiswas_generation/

>> Generation X was labelled by a novel of the same title by Douglas Coupland, which charts the lives of three young Californians who withdraw from mainstream society. A cursory mention of Generation Y as the forthcoming generation gives Generation Y its label.

Martin Cowie is a senior consultant within the life insurance division of the actuarial and insurance solutions practice of Deloitte. His views are his own and do not represent those of Deloitte.