These days, you often hear young folks griping about how tough life is, even though we’d think things should get easier with all the tech we have. But the reality is many of us are struggling—mentally and financially.
In this blog, I want to dig into this problem from different angles and try to figure out what’s going on.
Comparison is the Thief of Joy
Young Millennials and Zoomers find themselves grappling with the harsh reality that achieving the same financial prosperity as preceding generations is an uphill battle.
This generational cohort is inundated with the opulent lifestyles flaunted by influencers, celebrities, and other media personalities, further exacerbating their sense of inadequacy.
In a recent survey conducted among young adults in South Korea by Lee (2020), compelling evidence emerged showcasing a pronounced link between plummeting self-esteem and the pervasive habit of incessant comparison fostered by social media platforms.
This correlation underscores the profound impact that the virtual realm can have on one’s perception of self-worth and personal achievement.
There is, therefore, not merely an economic challenge which faces young people today, but a significant psychological component.
Economic Privilege
Many of the boomers in the developed Western economies were privileged enough to live during an extensive growth period after the war.
Bear in mind, I’m not saying that anything is the fault of previous generations – these were simply the circumstances of the time.
Think about this fact alone – the global population was around 3.7 billion in the 1970s – now it is almost 8 billion. Economics is about dividing out resources and there is no question that resources being divided more thinly between larger populations makes it more difficult for everyone to get their fair share.
Homes
Pricing is moderated by demand and supply, and in areas such as housing, there has not been enough supply to satisfy demand.
In the UK, 300,000 new homes are needed each year to satisfy demand yet only 233,000 homes were built in 2022. The pandemic and subsequent lockdowns also put a hold on housebuilding, so there is no question that more needs to be done to provide homes to those who need them.
To further illustrate the issue, one of the biggest providers of housing and house building after the war was the government. In fact, the state built significantly more houses than the private sector. Now the public sector accounts for a comparatively small number of houses (only around 1%).
This has meant that houses have become quite unaffordable, as the demand is fierce yet the supply is and probably will remain low.
For those who own their own homes or have manageable mortgages, rising house prices are a positive, but for young people, who generally own few assets, rising house prices are simply a source of despair.
Higher Interest Rates
After the financial crisis interest rates were cut to record lows and these low rates have persisted over time.
This has helped precipitate the booming asset bubble – cheap money allows people to borrow more over time.
Yet, it is today’s higher interest rates which has ironically pushed many over the edge, who have had to remortgage at higher rates.
Furthermore, as demand for housing remains so strong and stock remains low, house prices have not crashed in nominal terms (without taking inflation into account).
These higher interest rates have also meant that landlords have hiked their rents considerably (around 9% on average in the UK) which has further affected young people’s ability to build up savings and investments.
Unequal Tax System
As a small business owner, I know the tax system is broken. Employees get taxed to high heaven – especially higher earners in the middle class.
Consumption taxes such as VAT penalise those on lower incomes the most – businesses and HNWI (high-net-worth individuals can usually claim it back). Fuel duty also affects your everyday worker and commuter.
With the low VAT threshold of £90,000 as of April 2024, there is an incentive for businesses to avoid tax by pushing their revenues under the threshold, or potentially even attempting to evade tax entirely.
Business rates further set in motion the decline of the high street. This, at the end of the day, harms everyday working people.
Multi-national corporations are the ones who can offshore their tax affairs and avoid these big tax bills – the common man, and the small business holder, are left holding the bag.
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Income vs Capital Income
It’s true that the tax treatment of different forms of income can significantly impact overall wealth accumulation.
Individuals who derive income from assets such as businesses, stocks, real estate, or intellectual property often enjoy more favourable tax treatment compared to those who primarily earn a salary from employment.
Let’s delve into why this is the case and explore some of the advantages of owning assets:
- Tax Rates: Generally, income from wages is subject to higher tax rates compared to capital gains, dividends, and other investment income. In many countries, there are progressive tax systems where higher income brackets face higher tax rates. On the other hand, capital gains tax rates may be lower, especially for long-term investments.
- Tax Deductions and Credits: Asset owners can often take advantage of various deductions, credits, and exemptions not available to wage earners. For example, real estate investors may deduct expenses such as mortgage interest, property taxes, and maintenance costs. Business owners can also deduct business expenses, depreciation, and other costs related to generating income.
- Tax Deferral: Investors can often defer paying taxes on capital gains by holding onto their investments. For example, individuals can delay paying taxes on capital gains from stocks until they decide to sell them. This deferral allows assets to grow tax-free until they are sold, potentially resulting in significant tax savings over time.
- Passive Income: Income from assets such as dividends, rental properties, and royalties can be considered passive income, which may be taxed at lower rates or even qualify for special tax treatment. Passive income requires less active involvement compared to earning a salary, allowing individuals to potentially generate income while having more flexibility with their time.
- Asset Appreciation: In addition to generating income, owning assets such as stocks or real estate can also result in capital appreciation over time. While this appreciation is not taxed until the asset is sold, it can contribute to long-term wealth accumulation.
- Asset Protection: Certain structures, like owning assets through a corporation or trust, can provide additional asset protection and tax planning opportunities. These structures may allow for more efficient tax management and shielding of assets from creditors or legal liabilities.
However, it’s important to note that the tax landscape can vary widely depending on factors such as jurisdiction, individual circumstances, and changes in tax laws.
Additionally, owning assets comes with its own set of risks and complexities, and successful asset management often requires careful planning, diversification, and ongoing attention.
Conclusion
Young people have to contend with the fact that they are under pressure financially, and have to reimagine their role in society as automation and AI take over – and it will, and find some way to build their capital!
In today’s economic landscape, young people face not just financial hurdles but also psychological challenges. From constant comparison on social media to unequal tax systems and soaring housing prices, the path to financial stability seems daunting.
The gap between income from wages and capital gains highlights a fundamental inequality. While asset ownership offers advantages, it’s important to recognize its complexities and risks.
To tackle these challenges, we need conversations and systemic changes for greater equity and opportunity. By working together, we can build a more inclusive and prosperous future.
Bibliography
Lee J. K. (2022). The effects of social comparison orientation on psychological well-being in social networking sites: Serial mediation of perceived social support and self-esteem. Current psychology (New Brunswick, N.J.), 41(9), 6247–6259. https://doi.org/10.1007/s12144-020-01114-3
