Thursday, June 7, 2012

Generational Challenges

A common theme in today’s financial news is to bemoan the large debt obligation which will be a legacy to today’s youth. In fact this is not really a new idea as Canadian federal governments since Trudeau have piled on the debt with little thought beyond the next election. However, many commentators look at direct comparisons of dollars owed today versus the deficits in say 1980 or 1990. A dollar in 1980 is not the same value as a dollar in 2012! Similarly debt as a percentage of GDP can often ignore the differing impacts of high versus low interest rates on debt repayments.
A number of journalists have focused on the challenges of being a University student today versus back in the "good old days"! On a smaller scale let’s look at an example of a university student graduating in 1979 ( like me) and one graduating today. Recent articles have suggested today’s youth have a much tougher road to hoe, however I would suggest it is just a different road to a similar end. I graduated with $9,000.00 in Student Loan’s and my interest rates (2 loans) averaged just over 10%. My payments were roughly $100/mo for 15 years (note: I paid it off in 5 years). Today’s students are graduating with more debt but with lower interest rates as well. A student graduating with $18,000.00 in debt and with a 5% interest rate would have payments of $143/mo.
Here is where the current thought process on debt comparisons becomes questionable. While today’s students have a larger monthly payment, my job after graduating in 1979 paid $9,000.00 per year. The equivalent graduate level full time job today pays well over double my 1979 stipend.  Similar to today's youth, I was underemployed for a couple of years after graduating and I ended up moving several hundred miles to find the job I took. As well, unemployment was virtually the same as today but in 1979 was on its way to 12% within the next 36 month. We can only hope not to repeat that same mess today. My point here is not to say how easy today’s students have it but rather to suggest the change to a more stable employment( trust me 7.5% is more stable than 12%) and lower interest rate environment have provided some advantages that are being ignored by many. Again, this is NOT an attempt to say it is easier today but rather it is an attempt to show each generation has it's challenges. The end group of baby boomers did not have an easier ride given early boomers took all the good jobs and were too young to be retiring as us tail-enders tried to climb the ladder of success. Similarly today, boomers turning 65 still do not seem to want to get out of the way and let younger workers move forward; effectively blocking late boomers in the early years and also blocking graduates looking for work today!
On a much larger scale, today’s young families are benefiting from the low cost of borrowing and the much lower inflation rate today versus the early 80’s. Carrying costs on homes are much lower and today’s youth are buying homes larger than their parents could even contemplate. Yesterdays 900 square foot bungalows are replaced by homes over double that size and still called “starter homes”. Obviously homes today are significantly more expensive; however wages, interest rates, and living standards are also very different. My first mortgage was at 14%!
A more significant legacy benefit today is the income and lifestyle transfer from today’s seniors to today’s youth. Seniors have given up significant portions of their income as a consequence of low interest rate policies. By keeping rates artificially low the government is effectively reducing investment income seniors require for living expenses and forcing seniors to spend their capital assets. This is dramatically reducing the income, lifestyle and asset base of seniors and benefits borrowers who are accumulating assets. A senior who saved $500,000 would have expected to earn 5%-6% in a bond/GIC portfolio using long-term return trends. That should provide $27,500 in income before taxes. Instead seniors buying bonds today can expect returns of 2%-3% or $12,500 in income. The net result is seniors are eroding their capital as they attempt to increase cash flow for living expenses. At the same time young families are financing homes and cars at historic low rates of interest. As for the debt bomb, I am not sure any generation will ever pay back our debt. We will cover the interest payments for generations to come and wait for long term inflation to erode the value of the debt.
So who has it easier yesterdays tail-end boomers or today's new graduates? Neither, I would suggest. Today’s youth face today’s challenges and yesterday’s youth faced equally challenging but different issues. We all hope that the hyper inflation, stagflation, “price and wage controls” (6 and 5 for those old enough to remember) and twelve percent unemployment are never repeated. Today’s parents are accustomed to having the children move back in after school to offset school loan expenses and to help the young adults save money for their first car and first home. Youth today feel constrained by challenging job markets and a sense of peer pressure to have it all “day one” and work out the payments later. Today’s seniors worry about how long the money will last, pensions under threat, eroding benefits and a government that is still and always spending too much and saving too little. Perhaps it is time to chill and all agree that we can be glad we faced our biggest deficit challenges in the 90’s and young and old alike can be glad we are in Canada and not Greece!
p.s. I know readers do not come here for social commentary but I felt the need to stray a bit today. Next blog will be back on topic, I promise.