The traditional paths to building wealth are becoming less accessible for young Americans. Here's what happened.

By Venessa Wong

Generation Z and young millennials are navigating major shifts in the economy that have made it harder to build wealth the way Americans did in the past

The American financial playbook - education, a stable job and homeownership - doesn't work like it once did, forcing many young people to seek new ways to pursue financial security.

To Eric Clark, it seems that a few decades ago, young Americans could "just go to college, and no matter how much debt you got into, you'd be able to find a job and everything was going to work out."

Clark's Gen X parents earned computer science degrees in the 1990s and secured stable jobs with clear trajectories for career growth straight out of college. They were "able to ride the dot-com boom," Clark told MarketWatch.

They also "worked with people who only went to college for two years and then dropped out, but were still able to get corporate white-collar jobs in the tech industry because they had the qualifications," he said. "A lot has changed."

Clark, 23, graduated with a business degree from the University of North Carolina at Charlotte last year. After months of submitting applications, he accepted a sales job paying $50,000 a year with virtually no chance of earning a commission, based on the company's benchmarks.

"When I went to school, it was not the job I envisioned," he said.

This year, he landed a job with a more promising career outlook, managing client accounts at a fintech company. "I'm extremely fortunate," he said. "I see people my age and older that are having terrible times in the job market."

New American Playbook: New rules for a new generation - and its money

Generation Z, whose members now range in age from 14 to 29, and younger millennials are navigating major shifts in the U.S. economy that have made the traditional paths to building wealth in America - education, a stable job and homeownership - less accessible. Artificial intelligence is threatening the future of entry-level jobs in the fields many people study in college. First-time home buyers face prices for starter homes that their incomes cannot cover. Consumer debt is ballooning.

Meanwhile, an entry-level salary doesn't buy the kind of life it did when Clark's parents were entering the workforce.

Those changes are forcing young adults to adjust their expectations and figure out other ways to build financial security. Many are renting longer, and those who can are investing earlier, focusing on passive income streams and developing multiple sources of income.

Young Americans are "experiencing some macroeconomic shifts that are, in a lot of ways, unprecedented," JP Julien, a partner at McKinsey and leader of the McKinsey Institute for Economic Mobility, told MarketWatch. "They're entering a labor market that is increasingly challenging for entry-level roles in light of AI ... and facing head-on a massive affordability challenge."

In a new study from the research group, young people cited the rising cost of living as the most common barrier to economic mobility. They also said financial security was their top aspiration.

It's a shift that Mechele Dickerson, a professor at the University of Texas at Austin School of Law and the author of a recent book titled "The Middle-Class New Deal," has witnessed as her students - and her own children, who are now in their 20s - try to make their way as independent adults.

"It's becoming increasingly hard for lower- and middle-income young adults to become and remain middle class, and to attain the markers of the middle class," Dickerson told MarketWatch. Such markers include a college degree, a stable job, savings for short- and long-term goals, and homeownership.

Incomes are not keeping pace with many expenses, she said, and "if you can't afford to buy a house" or achieve other common financial goals, "the earnings don't make you feel any better."

How the old formula for prosperity broke down

The traditional path for young people to succeed began to erode long ago.

The benchmarks for the contemporary understanding of the American middle class evolved in the 20th century, said Sam Pizzigati, an associate fellow at the Institute for Policy Studies, a progressive think tank.

Previously, "middle class" generally referred to workers - "doctors, lawyers, shopkeepers, that sat between the rich at the top and the vast majority of Americans at the bottom who had no savings, no homes of their own, and precious little education," he said.

But from 1940 to 1960, a number of forces - a boom in home building following World War II, low-interest loans provided through the G.I. Bill (which mainly went to white veterans), government funding to expand public universities and community colleges, and a strong labor movement - reshaped America's middle class into an educated group that was prosperous enough to buy a home and still have money for discretionary spending each month, often thanks to jobs that promised retirement security through a pension.

"The idea that average working people could afford homes of their own was so exotic," Pizzigati said.

But the middle class entered a prolonged period of weakening in the 1970s. Despite long periods of economic growth in the 1980s and 1990s, income growth, and wealth, was increasingly concentrated among the highest earners.

Wages stagnated, government funding for college was replaced with an expanded federal student-loan program, credit-card use increased, and debt became a larger part of the middle-class playbook.

Much of that debt was for housing, which historically had been "the way that low- and moderate-income American households built wealth," said Richard Fry, a senior researcher at Pew Research Center. Even today, aside from making a mortgage payment - which functions as a sort of forced-savings mechanism - households typically don't save much at all, he noted. Many don't even have retirement accounts.

Household debt grew from 45% of gross domestic product in 1965 to about 100% in 2007, at the height of the housing bubble. Prospective home buyers who would not have qualified for a loan in previous decades were approved - sometimes without having to verify their income or assets - during the subprime-mortgage boom in the 2000s, with disastrous economic consequences.

Gen Z-ers grew up in the aftermath of the 2008 financial crisis, which exposed the flaws of the debt-centric tool kit that had been offered to the middle class. It was the first time since the post-World War II economic boom that there was a large-scale, nationwide loss of middle-class wealth through housing.

A painfully slow economic recovery followed in the 2010s. Many newly graduated millennials were underemployed, working jobs that didn't require a college degree.

"A lot of people went off and got degrees, especially overpriced degrees," Joseph S. Moore, the author of a new book titled "How to Get Rich in American History," told MarketWatch. "We overproduced elite candidates, but there weren't that many elite jobs to begin with - and they're starting to shrink."

New businesses scaled up using gig workers, who were not offered stable hours, pay or benefits. It took nearly nine years - until 2016 - for the median income to recover to pre-recession levels.

The Federal Reserve characterized the period from 2007 to 2016 as a "wealthless recovery" for all but the richest Americans, as rates of homeownership and stock-market participation fell for low- and middle-income households.

On the heels of the COVID-19 pandemic, the oldest members of Gen Z embarked on their adult lives only to face an affordability crisis that touched everything from education to housing and childcare to groceries - and that continues today.

Meanwhile, AI began to emerge as a major challenge to employment, especially for those just starting out in the workforce.

Today, half of Gen Z-ers say their college degree was a waste of money.

As a result of all these shifts, the 20th-century markers of middle-class life may no longer be relevant in the 21st century, said UT Austin's Mechele Dickerson.

"The world that young people are facing" is not as straightforward as it was for many older Americans, she said. "It may be that the American dream of homeownership [becomes] the American dream of affordable housing."

The financial challenges young people face deserve more attention, she said. "Political leaders at every level - local, state and federal - need to come up with one thing they could do to make it easier for a young adult to become and remain middle class."

How young Americans are dealing with a broken playbook

Despite facing notable challenges and coming of age in a culture infected by "big woe," or an onslaught of despairing information, Moore believes there is still reason for young people to be optimistic.

"We have this illusion that what the baby boomer generation did, if it worked for them, it therefore must always have worked, and that's just not true," he said. This "doesn't mean nothing works. It just means different things work" in different eras.

Young adults may face new headwinds, but some of them will also benefit from new tailwinds, Moore added.

As Eric Clark, the recent grad, sees it, "there are some issues young people are facing that you can course-correct for." Some people he knows went into blue-collar professions, for example, and "it's worked out great." Yet there are other issues "that are out of our hands," he said. "There's no amount of personal responsibility that is going to fix the housing market."

Today's young people are questioning the old playbook: Get an expensive degree to land a good job and buy a home, even if that means loading up on debt. In many cases, they want money, and to cope with financial pressures, they want it fast.

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09-11-26 1301ET