The Unprecedented Debt Burdens Facing Millennials
This is a summary of testimony before the House Budget Committee. Read the full testimony here.
Chairman Price, Vice-Chairman Rokita, Ranking Member Van Hollen, and other Members of House Budget Committee, thank you for the opportunity to give testimony on the fiscal burdens faced by young Americans. I am a fellow at the Manhattan Institute for Policy Research and the coauthor of Disinherited: How Washington Is Betraying America’s Young. Over the past three months, I have traveled across the country talking about my book and hearing millennials discuss the economic problems that they are facing.
Young people ages 20 to 24 face an unemployment rate of over 9 percent. More than six years into economic recovery, many millennials are asking, “What recovery?”
This is especially problematic given that millennials are facing two separate, unprecedented financial burdens. The first, student loan debt, has been driven by poor federal policies. The second, unfunded health and retirement programs, was never voted on or approved by the young, yet they are still liable for the decisions of past policymakers.
America’s federal policies need to shift to reflect the growing public realization that both of these debts and the burdens that they place on millennials’ futures are unsustainable and unfair. Action sooner, rather than later, is no longer an option—it is a necessity.
At $1.3 trillion, student loan debt is widespread. College tuition has increased by 1,200 percent since records began in 1978—while food costs have risen only 250 percent over the same period. For my graduating class in 2013, about 70 percent of my peers needed student loans, and average debt at graduation approached $30,000.
Not only does the government’s $165 billion annual spending on Pell grants, student loans, and tax credits do little to offset the burden—it is contributing to the problem.
The federal loan program is effectively an individually-tailored subsidy for each school. Research from the U.S. Treasury Department found that for every dollar provided in tax-based aid, scholarships fell a dollar. The New York Federal Reserve estimated that every dollar in increased subsidized federal loans led to a 65 cent increase in tuition.
Universities do not lose by admitting federally-subsidized millennials who do not graduate. The schools still receive tuition payments, and if students drop out, other misled freshmen can easily take their places (and their funding) next semester. Only 39 percent of students entering four-year colleges graduate within four years. Within six years of entering college, the number of graduates is still below 60 percent.
Low graduation rates are the main reason why 34 percent of borrowers who owe less than $5,000 default. This is far lower than the default rate of 18 percent for those who owe more than $100,000.
Outstanding student loan debt is indeed a crisis. Talk of “free” or “debt-free” college does nothing to address the underlying reason why student loan debt is increasing—the perverse incentives created by federal student aid programs.
Moving to health and retirement programs, many people know that America is $18 trillion in debt, but this only captures a portion of the total fiscal burden. When future spending obligations on health and retirement programs, such as Social Security and Medicare, are compared with future tax obligations, the so-called fiscal gap is $210 trillion.
Absent reforms to promised benefits, young Americans are left with two options. They can either pay substantially higher taxes than their parents do, while not receiving any more benefits, or they can pay the same rate as their elders and receive far fewer benefits. Both outcomes are grossly unfair for millennials.
Washington is handicapped by health and retirement programs created by previous administrations. Federal mandatory spending on programs such as Social Security and Medicare takes up 13 percent of GDP, whereas discretionary spending is 7 percent. This leaves less money for more-essential functions of government.
If trends continue, workers could be paying a combined employer-employee payroll tax cost rate of 31 percent in 2050 just to cover Social Security and Medicare payments. This is double the rate payed today.
It should be celebrated that life expectancy has increased since Social Security and Medicare were created. However, these programs need to adjust with the changing reality. While poverty among some members of the elderly population is still a problem, today’s retirees differ drastically from those of the past. The average household headed by someone 65 years and older has nearly 50 times the wealth of a household headed by someone 35 years and younger. In 1984, this ratio was 10:1.
While righting the course of America’s fiscal ship will not be easy, delaying action will only make matters worse.
Thank you again for the opportunity to testify. I look forward to your questions and diving deeper into these difficult issues.
Read the full testimony here.
Meyer is a fellow at the Manhattan Institute for Policy Research and the author of the new report “Uber-Positive: The Ride-Share Firm Expands Transportation Options in Low-Income New York.” Follow him on Twitter here.
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