c.2020 The New York Times Company
WASHINGTON — “They say millennials are lazy,” billboards plastered across 15 major cities declared last summer. “Retire early and prove them right.”
That sentiment, reflected in ads for the investment manager Prudential, is the stuff of a 30-year-old’s fantasy — and the Federal Reserve’s nightmare.
A young generation of aggressive savers could leave central bankers with less room to cut interest rates, which they have long done to boost growth in times of economic trouble.
To leave the workforce early, millennials would need to build up massive retirement funds and consume less in the process. That hit to demand could slow growth and force rates to drop ever lower to entice spending. And if today’s workers actually managed to retire young, it would exacerbate the situation by shrinking the labor force, further weighing on the economy’s potential.
Millennials, who are roughly between the ages of 24 and 39 and have not lived through pronounced price spikes, already have the lowest inflation expectations of any adult generation. Their belief that costs will not increase could eventually slow actual price gains by making it hard for businesses to charge more. The Fed’s main interest rate includes inflation, so that would leave it with even less room to cut.
It may not come to this. Millennials could become more worried about inflation as they age, giving companies more room to lift prices. Their difficult post-recession entry into the labor market means many are laden with student debt, so it’s unclear if they will be able to retire young. But many indicate that they want to leave the workforce early — an ambition that economists say could spell macroeconomic trouble if realized.
“It would lower interest rates — that’s certainly true,” said Joseph Gagnon, an economist at the Peterson Institute for International Economics. “It would be a double whammy: It directly raises savings” and “it would further reduce the need to invest in factories and offices for these people.”
Interest rates have been falling for decades, and demographics are a major factor in that decline, economists say. Once people are past middle age, they are living longer without working correspondingly later in life, so they have been saving heavily to fund extended retirements.
Millennials, already accused of killing everything from paper napkins to mayonnaise, would happily exacerbate the drop in interest rates, which baby boomers have driven to date.
Of millennial workers with an active 401(k), 43% expect to retire before the age of 65, based on data from T. Rowe Price. For Generation X — often defined as those aged 40 to 55 — that figure is 35%. While the T. Rowe Price survey targeted a privileged group, broader polls have turned up similar findings.
Members of Gen X are short on savings, so they may need to work further into old age. But younger people have time to turn things around: While they got a slow start, they are still under the age of 40. Millennials have begun saving more as they work in greater numbers and benefit from a record-long economic expansion.
There’s even a movement — Financial Independence, Retire Early, or “FIRE” — dedicated to frugality in pursuit of quitting the workforce as soon as possible.
But there’s a paradox to thrift: Saving, even if virtuous on an individual level, can cause economic trouble en masse. If ambitious cash stockpiling were to catch on, it could exacerbate secular stagnation, a term that Harvard University economist Lawrence H. Summers repopularized to describe the low-growth, low-inflation state of many advanced economies.
When consumers save a big portion of their income, they are not spending as much on dinners out, movie nights and cars. Businesses respond by investing less in equipment and technology, and productivity stalls. Bosses are unwilling to pay their workers more for the same output, and weak pay gains further restrain spending.
Retirement saving behavior is not the only driver causing economic torpor and lower rates. Inequality has left a small number of people with more money than they can realistically spend. Slower labor force growth and more iterative technological improvements could also have an impact.
The lower interest rates that result from high and unequal saving might sound great — think cheaper mortgages — but they leave economies vulnerable to shocks. In the United States, for example, rates are now in a range of just 1.5% to 1.75%, leaving the Fed room for about six quarter-point rate cuts in a downturn. Headed into the last recession, rates topped 5%.
Fed officials think mass bond-buying and promises to keep rates low for longer can give them power to fight a slump. But the jury is out on whether such alternatives will add enough ammunition to make up for lost room on interest rates.
Even Ben Bernanke, a former Fed chair with an optimistic take on the central bank’s ability to prop up the economy in a downturn, says officials could end up in a tight spot if rates drop substantially lower.
It is anyone’s guess whether they will stabilize at low levels, rise or resume their descent.
“A continued downtrend is as likely as reversion to normal,” Summers said. “Lots of the structural forces that are driving this seem likely to continue.”
That’s what makes millennial retirement behavior so interesting: It is a wild card still, one that could slightly lift or substantially lower rates going forward.