Millennials Start Adulthood With A Maxed Out Credit Card

Life is a challenge for Millennials, especially those born in the later years of that generation. Today’s 20-somethings have grown from childhood to young adults during the worst economic recession in four generations. They spent their teenage years swimming upstream against a nasty undercurrent of pessimistic economic news.

Now they are ready to take on adult life. College or not, it is time to start thinking about those life chores called family, mortgage, health insurance…

And that credit card their parents maxed out in their children’s names.

Wait – what credit card?

The federal debt. Yes, exactly. It may not look like a credit card, and those who got their hands on it certainly did not go through the usual credit scrutiny. But that changes nothing: the national debt still works as an inter-generational credit card.

The parents of the Millennials have used the federal government’s credit line to buy themselves entitlements that they otherwise could not afford. Half a century of almost uninterrupted budget deficits have built a debt pile higher than our GDP.

Over and over again, Congress has increased its own credit line, in other words raised its debt ceiling. It looks like they will do it again in October. Imagine the parents of the Millennials calling the credit card company for yet another credit line increase. Imagine them adding the icing on the cake by asking that “Oh, and by the way, send the bill to our kids”.

If I were a Millennial, I would be outraged about this. It is immoral and disrespectful to expect others to pay off your debt. Not to mention the big hole that the cost of this debt will dig in the finances of coming generations.

This last point is crucial. Suppose Millennials Jack and Jill get married and start working at 25. Their first-year earnings total $65,000. They earn average college-graduate salaries throughout their 40 years in the labor force.

They have the usual stack of bills every month: student loans, food, cell phones, utilities, a car payment, insurance. If they are lucky they can save a little bit for a house when their first child is born.

Now comes the bill for the national debt. Suppose the debt only increases with inflation over the next 40 years, and – miraculously – the interest rate is frozen at three percent.

Time is now for Jack and Jill and every other taxpayer to pay their share of the interest cost on the national debt. Suppose it is collected as a proportionate “interest tax” on every working American.

Jack’s and Jill’s share? $11,800 per year. That equals 18 percent of their pre-tax household income.

Before any other expenses.

With average careers Jack and Jill will make a combined lifetime income of $5,756,000. Out of that income they will pay $1,046,000 in “interest tax”.

What do they get for all that money? Nothing. Unlike any other tax, this “interest tax” does not go toward services that government provides here and now. It is a cost for spending that previous generations have enjoyed.

Once could object that this is a stylized example. The cost of interest on the federal debt is covered with general tax revenue, and is therefore not as easily identified as a direct cost for an individual household. But that is a moot point. We all pay all federal taxes, either directly like the personal federal income tax, or indirectly by giving up some earnings so that our employer can pay corporate income tax.

Either way, the average Millennial family will have to fork over more than a million dollars over their lifetime just to pay interest on the federal debt. We have not even considered the costs of paying down the debt – and that means that when Jack and Jill retire they will hand over the responsibility for the “interest tax” to their children.

Crazy, is it not? Yes, it is. But it is also the future that the Millennials are facing.

Unless, of course, they decide to put an end to endless Congressional borrowing. A good start of that would be to join the fight for a balanced-budget amendment on the U.S. constitution.

Sven Larson, Ph.D., is an economist and Member of the Council of Scholars of Compact for America. He is the author of Industrial Poverty (Gower Publishing) about the debt crisis in Europe.

About Sven Larson, Ph.D., Economist 15 Articles
Sven Larson, Ph.D., is an economist and Member of the Council of Scholars of Compact for America. He is the author of Industrial Poverty (Gower Publishing) about the debt crisis in Europe. Find his daily blog articles at America’s Fiscal Future.