Kotlikoff: Gen Z Set Up For Debt By Their Parents

The well-known professor and economist says Gen Zers need to take steps now to take charge of their own — and their parents' — financial futures.

By Eleanor O'Sullivan

When Professor Laurence Kotlikoff says, “Gen Z needs to become the financial planners for the older generation — their parents and grandparents,’’ he’s not kidding.

Just as when he wrote in his book “Money Magic’’ and advised readers not to borrow money for college, which he was sure did not thrill his employer, Boston University, Kotlikoff expects a certain resistance to his theory that Gen Zers had better take control of not just their money but their parents’ money, too.

Gen Zers face future debt because their elders set them up for it, according to Kotlikoff. He says too many people are retiring at 62 when Social Security is first available, thereby losing many thousands of dollars in benefits instead of waiting until full retirement age to collect. Furthermore, they’re not saving enough money in their 401(k)s, and they have credit card debt.

And because their elders are living longer than expected, children and grandchildren are footing the bill for their medical needs and everyday necessities.

Where can Gen Zers learn how to manage money?

One resource is Kotlikoff’s patented software MaxiFi. Its website maintains some ideas that are sure to raise a few eyebrows among financial advisors, including this one: “The conventional approach to personal financial planning was developed to sell financial products, not provide sound financial advice.’’

Kotlikoff is a professor of economics at Boston University and the author of 19 books on finance, including this year’s “Money Magic.’’ From his home in Boston, Kotlikoff talked about what young people can do to have a secure financial future.

“Can a kid who is 15, or even 14, figure out the software (of MaxiFi)? Yes, in half an hour,’’ he said.

After entering basic financial information, such as one’s projected occupation, working and living locations, and retirement age goal, the software will predict how much money one needs to save to have a projected amount of spending money.

”If you’re 18, you need to start lifetime planning: what kind of career you want; how much you want to borrow on a student loan; whether you can afford a certain size house; how long you expect to work — all these things can be planned,’’ he said.

He rattled off startling figures and statistics that should get Gen Z’s attention, such as this one: 3 million Americans over the age of 60 are still paying off their college loans.

“The graduation rate from college is 60%,” he said. “Why would you want to take the risk of borrowing money when 40% do not complete college?’’

Urgent need to educate Gen Z

Kotlikoff said the need for awareness is urgent. He recently met with a student who has a wealthy father who believes his grown children should take responsibility for their finances. The wealthy father told his daughter he would support her through high school, but after that, he advised her to finance college through a loan.

“I asked her what percent she was being charged; she didn’t know,” he said. “They sign these papers and they have no idea what they’re signing.’’

At 40, 50 or even 60, some people are taking in and paying the bills of their parents, who failed to plan their financial futures, according to Kotlikoff. Their children are being lumped into a group faulted for bad financial behavior.

“It may sound crazy to write a column called ‘You Are Your Parents’ Financial Guardians,’ but I talk to younger people about their parents screwing up and how that will come back to them.

“And then you have the behavioral scientists like (Nobel laureates Daniel) Kahnemann and (Richard) Thaler basically blaming people for making mistakes because they’re myopic, or financially illiterate, it’s their fault.

“I think they’re misguided. They need to realize that economics, like medicine, has to become prescriptive not descriptive.’’

Kotlikoff envisions youngsters sitting their parents down and explaining to them the facts of fiscal life, saying things like  “‘Dad, here is the living standard you want, but you could get sick or have a longer retirement than you worked and less money to finance it, or you could end up working longer than you want.’”

Taking his own advice to help his family

Kotlikoff speaks from personal experience about children needing to know how to help their parents through turbulent financial times. He urged his siblings to buy an annuity to support their mother, then 88, in fear that her money would run out.

“‘Are you out of your mind? Her life expectancy is four more years,’ they said, but my mother lived until 98 and the annuity was a huge help.”

Gen Zers, born between 1997 and 2012, are now between the ages of 10 and 25. What can they expect when they are the age of their parents or grandparents?

“Major tax hikes are coming their (Gen Zers’) way. For example, Social Security benefits [for tax purposes] are not inflation-indexed, Medicare is not inflation-indexed. So everybody in 40 years because of inflation will be treated as super-high earners,” he said.

“Beyond that, we have to face the fact that as a nation, we are fiscally broke. I don’t say that lightly. I’ve written two books on that topic. We are making money to pay our bills. But most of our debts are off the books.”

U.S. fiscal shortfall could hit hard on Gen Z

“If you put together all the projected outlays, we’re talking about being 8% short of GDP. We need to raise taxes, and the longer we wait, the bigger that 8% number gets, he said. “What does that 8% mean to Gen Z? It means tripling the payroll tax, or maybe doubling the payroll tax, from 12.4% to maybe 20% or 25%.’’

Republican Sen. John Thune of South Dakota is among the legislators who have drafted bills to address long-term fiscal problems, Kotlikoff said, but his bill died for lack of bipartisan support.

“Thune’s bill was in support of long-term accounting that would show how much debt we are leaving behind to our kids,’’ Kotlikoff said.

At the time of the bill’s introduction, Kotlikoff organized a movement to support the bill, and took out an advertisement in the New York Times bearing the signatures of thousands of other economists who supported it. He urges young people to lobby for long-term fiscal protection.

College is not always the best option

 A graduate of Ivy League colleges — the University of Pennsylvania and Harvard University — Kotlikoff says high-schoolers should consider alternatives to attending college, and suggests they check the U.S. Bureau of Labor Statistics website. It lists 850 occupations, and tells users how much they can earn in each job in various locations around the country.

“You can maximize your lifetime earning potential and minimize your lifetime debts by getting into a career that pays well. You could increase your standard of living by 30%.’’

He explains that issue in more detail in his book “The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy’’ in the chapter “My Son, The Plumber.’’

“With no risk, you can have a much higher living standard,” he said. “It’s simple: The first thing we should do is pick up dollar bills on the street. We should go for low-hanging fruit.’’

Kotlikoff, whose columns have appeared in the New York Times, the Wall Street Journal, Bloomberg, Forbes, the Financial Times and the Boston Globe, said he will devote an upcoming column on his website to the issue of Gen Z and their economic future. A free download of his book “You’re Hired!’’ and access to his columns are available on his website.

In a four-decade career in journalism, Eleanor O’Sullivan has reviewed many books on best practices for financial advisors, has written for Financial Advisor and the USA Today network, and was the movie critic for the Asbury Park Press.

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