Millennials Pose a Major Problem for States

Demographic trends suggest trouble ahead for government revenues.
May 2018
By Frank Shafroth  |  Columnist
Director of the Center for State and Local Government Leadership at George Mason University

The number of babies born in the U.S. fell in 2016, and the birth rate continues to inch its way down. That’s a problem for companies like Kimberly-Clark, which manufactures Huggies diapers and Kleenex tissues. As a result, the company plans to close about 10 plants, shedding 13 percent of its workforce -- Kimberly-Clark’s biggest restructuring in over a decade.

But the demographic trend is also a problem for state and local governments, especially those that host Huggies and Kleenex plants. In Fullerton, Calif., for instance, Kimberly-Clark’s 62-year-old factory that employs more than 300 people is on the company’s shutdown list. For Fullerton, that means a likely downturn in constituent income and spending power -- and a threat to revenue intake.

Beyond that is an even bigger issue for states and localities. The downturn in births is not balanced by an equal diminishment in the growth rate of older people. Americans are living longer. The National Institute on Retirement Security (NIRS) estimates that more than half of millennials will live to the age of 89 and beyond. But they aren’t necessarily planning for such an inevitability. A recent NIRS report finds a deeply troubling retirement outlook for the millennial generation. A majority -- 66 percent -- are not saving for retirement, and those who are, aren’t saving nearly enough. Among Latino millennials, the numbers are even worse: 83 percent have nothing saved for retirement.

We are, in effect, watching an almost upside-down pyramid take shape where we have a greater generation of retirees assuming the fiscal and financial support of a smaller generation of millennials. Moreover, even though two-thirds of that generation work for an employer that offers a retirement plan, just over one-third participate. As these millennials age into their golden years, it is likely to be state and local governments that get stuck with the bills to care for them. Absent actions now to address this demographic tidal wave, state and local leaders will need to brace themselves to address poverty rates for senior citizens not seen since the Great Depression. Some estimates are that by 2050, nearly 25 million older Americans will be in or near poverty.

Another trend that will impact state and local purses: reduced property values. The National Association of Realtors reports that the largest generational group of homebuyers are those 36 years or younger -- a group that is growing smaller. Millennials also seem to be less ready and willing than their parents and grandparents to buy homes. This will likely have implications for assessed property values and affect cities, counties and public school districts.

Then there are the impacts from federal actions, including record federal debt and deficits -- interest rates will rise as the fed borrows to finance U.S. debt -- and the new tax law’s caps on the deductibility of new mortgages and the elimination of the deduction for new and existing home equity loans. These latter caps will also negatively influence assessed property values. Given these changes, Moody’s Analytics estimates an average nationwide drop in housing prices by this summer of 4 percent.

These changes and demographic trends appear certain to be reflected in state and local tax intakes. It will be elected city and state leaders who will have to make hard decisions -- the kinds of decisions that members of Congress and the president simply are not making -- about how to balance their budgets.

The fiscal challenge is that the longer we wait, the more expensive it will be to resolve -- not just in terms of deficits and higher taxes, but also in the very fabric of our country.