Millennials display a strong revultion towards the financial world and, by extension, towards personal investing. This is understandable because of the fresh memories of the Financial Crisis of 2008. Yet this may turn out to be a huge mistake leading them to financial distress later in life. Worse, their dire financial situation as pensioners will likely be perceived as self-inflicted, resulting from their own folly and thus may not elicit much sympathy from policy-makers.
Though I was already vaguely aware that millennials are strangers to investing for pensions, it was at a recent academic event that it dawned on me just how serious the problem is. A couple of months ago I attended a conference organised by young economics graduates. One of the presenters (from a left-leaning school in New York City) made the case against saving and investing for a pension on the ground that the expected returns for the very long term are currently as low as 1-2%. The presenter used strong language calling investing for a pension a ‘ludicrous’ propostion. My immediate reaction was that the presenter herself was being ludicrous in her bold assumptions about the future of investing. Yet the audience, almost entirely composed of millennials, exploaded into an exalted applaus several times during the presentation. Apparently, strong sentiment and populist sloganeering against finance trumps common sense.
Why are millennials’ attitudes wrong? Let’s start with this: who is to say with sufficient certainty that the return on assets is going to stay at 1% for the long term, meaning the next 30-40 years. It is actually ludicrous to assume that such abnormally low returns are a certainty or even a very high probability. Predicting where the financial market will go is nototirously difficult. If anything, we have statistics for the last 200 years of constantly rising stock market, on avarage by about 8%, for any period of 30 years. To claim that this time it will be different is dangerous and even irresponsible. (Yes, we are in a secular stagnation period, yet we can fairly easily move out of this mode and back into growth. The pain we are experiencing in the developed world is largely self-inflicted.)
Millennials apparenly rely on future policy based on a tax-based pension plans. But right now the tendency is exactly the opposite, i.e. towards defined contribution pension schemes. If on top of that the markets perform reasonably well in the next 25-30 years, which is not impossible to happen, then the policy makers will simply blame millennials for their financial diffiuclties on their own profligacy and irresponsibility.
Surely millennials could object that they don’t have the money to invest in the first place. This is not a good argument. Putting aside as little as $100 a month starting at the age of 25 can make a pot of nearly a million dollars by the age of 65 if invested in a diversified stock portfolio in the US market. Sounds incredulous and yet, assuming a return of 8%, it is true thanks to the magic of the long-term compounding. But this magic works if one starts early – the key factor in coumpounding is time.
Even if the returns turn out to be lower than the historical avarages, a smart investing strategy starting early makes perfect sense. Staying on the sidelines and keeping one’s assets in cash only is irresponsible. And that is precisely the reason why policy makers may refuse to bail out millennails one day when their thin pension pots turn out to be a huge problem.