A Generational Crisis: Restructuring America’s Social Insurance System to Better Protect Young People

March 31, 2020

In the last three weeks, it has become clear that millennials are going to experience a second major recession in their working lives before they turn 40.

Even before the COVID-19 crisis, it was widely documented that this generation—ages 24 to 39 and the most racially diverse adult cohort in history—was experiencing long-term harms from the 2009 financial crisis. The economic scars of the last recession were already affecting young people’s ability to save, invest, and start families; now, those scars are reopened wounds. And, unless the government takes a very different approach to our current crisis than it did in 2009, the class of 2020 can look to millennials for what their economic future holds.

The generational crisis that millennials face (and Gen Z appears to be teetering on the brink of) should spur us to think about how we can restructure the social insurance system to protect young people from macroeconomic shocks to their working lives. Typical responses to economic downturns focus on seniors’ lost savings and the lost wages of the newly unemployed. But a comprehensive safety net should cushion the long-term blow of entering the job market in a bad economy just as it does for injury and illness. Far from making this kind of structural change, the policy response to the last recession exacerbated the downturn’s long-term effects on millennials by pushing them to take on huge amounts of student debt. If legislators write policies that factor labor market conditions at job-market entry into the social insurance system now, they could rectify this past failure and ensure that future generations do not suffer a similar fate.

At this point, we have quite a bit of data on the effects of recessions on job market entrants. One leading study on this topic, by economist Lisa Kahn (no relation), found that for every percentage increase in the unemployment rate, the wages of college graduates entering the labor market were reduced by 3 to 4 percent a year. Eighteen years after graduation, the effect was still roughly 2.5 percent. This amounts to a loss of nearly $80,000 over the first 20 years of a person’s career. Furthermore, a study for the National Bureau of Economic Research (NBER) showed that the labor market entrants hardest-hit by the unfortunate timing of entering the labor market during a recession are those with the lowest predicted earnings (namely non-white and non-college graduate workers). Additionally, cohorts that enter the workforce in a recession have low employment rates even after the recession ends. This compounds into significant wealth effects for these disadvantaged cohorts, exacerbating existing—and persistent—racial and gender wealth gaps. According to a 2016 report from the St. Louis Fed, the Great Recession reduced wealth levels for people born in the 1980s by 34 percent.

Despite these stark facts, relatively little aid is targeted at these cohorts. Unemployment insurance (UI), the existing social insurance program designed to protect workers from macroeconomic shifts, does not protect against the bad luck of entering the workforce during a recession as opposed to a period of growth. Unemployment benefits are not available to new job-market entrants, nor do they make up for the lifetime of lower wages for those who are able to find a job. As a society, we have never considered the long-term impact of macroeconomic conditions at labor-market entry important enough to address through social insurance. Millennials’ experience should change this.

To their credit, Democratic members of Congress made attempts in the recent stimulus package to address the needs of young people. In addition to proposing to cancel some student debt, they included a “job entrant compensation payment” for individuals whose work history is insufficient to qualify for unemployment insurance, but who would be entering the workforce were it not for the pandemic. This provision did not make it into the final package. Broadening the unemployment insurance system to include new labor-market entrants is important, as a recent report on a 21st century UI system made clear, but it does not address the long-term wealth effects of entering the labor market in a recession.

We need big ideas that address the long-term earnings effects of recessions on young workers. For example, the Social Security formula could be changed to increase the benefit of those who enter the labor market during a recession. Right now, Social Security benefits are calculated as a percentage of a person’s average indexed monthly earnings (AIME) during their 35 highest-earning years. This formula could be changed to increase the percentage of the AIME a person receives based on the national unemployment rate early in their career. Ultimately, building economic conditions at labor-market entry into the Social Security formula could compensate for the wealth effects of entering the labor market in a recession.

Another idea might be creating a job-market entrants’ tax credit triggered by employment numbers dipping below a preset level. The tax credit could be structured to last 15-20 years—the typical length of recession wage effects on job-market entrants—tapering as recipients spent longer in the labor market. Structured in this way, a tax credit would directly address the long-term wage loss job-market entrants experience in a recession, allowing them to build wealth at a similar rate to more-advantaged cohorts. It could also be increased if the same cohort faced another recession, as millennials now are.

The social insurance system exists to protect individuals from economic events beyond their control, but it insufficiently protects new labor-market entrants. The ideas proposed here should be considered, though they alone are not necessarily the answer. As millennials face the second major recession of their early working lives, it’s time to figure out how to build progressive, comprehensive protections for young workers into our social insurance system.