The Generational Financial Crisis

PORTFOLIO POINT: The global crisis is hitting home within families, with parents and grandparents unable to fulfil promises.

Last night I met a genuine generation Y person aged in her late twenties who had suddenly discovered that her “banker” (her parents) could no longer stand behind her. She was planning a dramatic change in lifestyle. The meeting was amazing because I was just about to write about two groups, some of whom are Eureka Report subscribers, who have a very difficult task ahead of them: telling their children they can no longer provide the level of financial support that had been expected.

The first group are those with older teenagers and children in their twenties, or the so-called generation Y. The second group have an even more serious problem because they are financing grandchildren with education but can no longer afford to do so. In looking at the first group and their generation Y children, I have been helped by a remarkable survey conducted by St George Bank (click here). With the second group and their grandchildren, I am relying on my own contacts. (By the way, in general baby boomers were born before 1965, generation X were born between 1965 and 1981, and generation Y were born after 1981.)

The parents of generation Y, the baby boomers, have watched their houses rise in value, seen their investments skyrocket and their jobs and careers prosper. Along the way they borrowed money, believing their success would remain a financial security blanket for their children. Their children, many of whom are now moving into their late teens and twenties, never felt any need to save because whenever they needed extra money their parents were always there. The St George survey found that few of the children know anything about their parents’ finances, and why should they as they simply had a one-way ticket to cash?

But the priorities of this group of parents is changing as a result of the global financial crisis. About half (48%) of those surveyed with adult children are now focusing on boosting their saving either for retirement (25%) or for other future expenses, not including their children (24%); a further 41% are focused on paying down debt – either credit card and personal debt (24%) or their mortgage (17%). Only 6% of the parents surveyed currently rate providing assistance to their children as a top priority.

However, at the same time they feel guilty when their children ask them for help and support because they want to help their grown-up children but they have suddenly realised that their circumstances have changed. The parents have to focus on their own needs and finances to manage their way through the tough economic climate. And so this group of parents face the tough task of telling their generation Y children that there is no longer money for first-home deposits, overseas trips, child care and perhaps even weddings. This is going to come as a terrible shock for generation Y because they simply have not had any great experience of saving for their own needs because it hasn’t been required. The parents now realise this is a clear gap in their children’s education. Unfortunately, in many cases they were proud, perhaps too proud, about their ability to provide money.

During the week I was also talking to Myer chief executive Bernie Brookes, who said many of these formerly affluent people had been wonderful customers and Myer went to great length to look after them. They are now changing their spending patterns by looking for cheaper goods and they are much more value-conscious. And, of course, these are the very people that are no longer providing financial security to their children. According to the survey, a great many in this group have not explained to their children their new financial priorities.

I am reminded of the events a year ago when many executives didn’t tell their spouses that their bonuses were about to be slashed and that their lifestyle would have to change. In time the families adjusted to the new circumstances but crucially, according to the St George survey, the children still don’t understand what had taken place. The obvious advice for people in this category is to sit down and talk with their children, but parents often have guilt feelings, so it is not easy. Yet it is very important that their children learn how to adjust their lifestyle to a circumstance where they have to stand on their own feet.

Certainly the generation Y person I spoke to had been told the “facts of life” by her parents and she was looking for cheaper accommodation.

A second group of parents are older and many are either approaching or in retirement. Their children are also older and have been encouraged by their grandparents to enrol their children in private schools. The parents want to make sure their grandchildren have the same opportunities they gave their children. In many cases these “adult” children have large mortgages and are struggling to maintain them on their current income levels. So the grandparents have come in and subsidised the school fees. I don’t know what percentage of private school fees are subsidised by grandparents but it is likely to be at least 30–40% of many private school populations. Suddenly the grandparents’ nest eggs have fallen sharply.

Some are considering returning to the workforce, but that is not an option for everyone. This group of grandparents face a problem that is even more agonising than those facing the parents of generation Y. They want their grandchildren to get the best education but are torn about their own finances: they know they might live for 10, 20 or 30 years and don’t want to see their final decade or two on the age pension. Many are telling their children they simply can’t maintain their current share of private school fees. I don’t have any easy answers for these two groups of people. Whatever course they adopt will not be easy.

However, those older people that are fit and have marketable talents should consider extending their working life particularly if their grandchildren are at critical points in their education. As for generation Y, they are probably going to be better off in the long term learning to stand on their own feet.