Chad Gentry would rather bet on his own ability to save for the next 40 years than on the U.S. Social Security Administration's solvency, so enrollment in his employer's 401(k) plan was a no-brainer.
“I wanted to take advantage of that to help build retirement from the start,” said the 24-year-old, who has worked as an accountant at Fleet Feet Sports in Carrboro, N.C., for three years. “I've gone in with the mindset from Day 1 to not plan on getting any Social Security.”
Concern that the future of the federal safety net for seniors is precarious and the ubiquity of 401(k)s are prompting those born from 1979 to 1996 to get an earlier start on saving than prior generations, according to a report from the Transamerica Center for Retirement Studies. Millennial workers began building nest eggs at a median age of 22, younger than both Generation X, which started at 27, and the baby boomers, who started at 35.
Though many millennial workers say they're risk-averse and stock-shy as a result of the most severe recession in the post-World War II era, their deeds are telling a different story. That bodes well in the long run for a generation that may have to bear a greater share of retirement costs on its own, even if it means the economy will get a little less consumer spending in the short term.
“The concern was that they would be like the Great Depression generation,” which shied away from equities, said Sarah Holden, director of retirement and investor research at the Investment Company Institute in Washington. In surveys, millennials “were saying that they were nervous about the stock market, they were saying that they were less willing to take risk, but the design of the 401(k) plans is really keeping them in equities.”
Of millennials offered 401(k) or similar plans, 71% took part, contributing a median 8% of their salaries, the Transamerica report said. The survey polled those employed either full-time or part-time at for-profit companies.
That stands in stark contrast to surveys showing young adults are risk averse. In 2012, 22% of heads of households younger than 35 who owned mutual funds said they would only invest in financial instruments with no or below-average risk even if it meant getting a below-average return, based on a survey by ICI, the mutual-fund industry's trade association.
That was more than any other age group except those 65 and older. A separate survey showed that 39% of adults 18 to 29 years old said cash was their preferred investment option for money they didn't need for at least 10 years, three times the share that picked the stock market, according to a July report from Bankrate.com, a unit of Bankrate Inc.
The increased use of defined contribution retirement plans — especially those with automatic enrollment features or options that reduce risk as an employee ages — is keeping millennials invested in equities in a way that flies under their risk radars, said Jean Young, the Valley Forge, Pa.-based lead author of Vanguard Group's How America Saves report.
Vanguard managed the most money in 401(k)-type retirement plans last year, with $613.5 billion in defined contribution assets as of Dec. 31, surpassing longtime leader Fidelity Investments.
Equities accounted for 81% of the investments in such plans for those 25 to 34 years old on average in 2013, second only to adults younger than 25, with 85%, the report shows.
About one-third of defined contribution plans offered by Vanguard had some type of automatic-enrollment component in December 2013, meaning people had to opt out in order not to participate, up from 5% in 2005, according to the report. This boosts participation by eliminating the need for action. Eighty-three percent of employees 25 to 34 years old stayed in the plans, according to preliminary data from 2013, compared with 56% participation from those who had to tell employers they wanted to enroll.
While socking money away now may limit the amount millennials have to spend on things such as clothing, restaurant meals, movies and gym memberships, the total effect should be positive for the economy, said Alicia Munnell, director of the Center for Retirement Research at Boston College.
“If you're saving more, you are spending less — there's no question about that, but in the long-run, more savings means more investment, and more investment means more growth,” she said.
For those like Mr. Gentry, it's that concern about the state of Social Security that's motivating them.
Without legislative changes, Social Security's trust funds will be depleted by 2033, according to the program's board of trustees' annual report. After that, tax income would be able to pay about 75% of scheduled benefits through 2088.
“Whether it'll be around or not, I don't know,” Mr. Gentry said. “It's just a lot safer to plan on not receiving that once you retire.”
Some 51% of millennials don't think there will be any money left for them in the Social Security system by the time they're ready to retire, according to a Pew Research Center report published in March. Thirty-nine% said the program will only be able to provide benefits at reduced levels.
“Millennials are keenly aware that the program is in trouble and that they are getting the short end of the stick,” said Romina Boccia, a senior policy analyst at the Heritage Foundation in Washington that promotes public policies based on principles including a more limited government.
There are other signs that millennials are paying attention to improving their finances, said William Emmons, a senior economic adviser at the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis.
While millennials have a large amount of student-loan debt, they are cutting back on borrowing in other ways by not buying houses or maxing out their credit cards.
“Compared to Generation X, it looks like the millennials are on a lower track of accumulating debt,” Mr. Emmons said. Young adults have reduced their debt more aggressively than the generation born between 1965 and 1980, though it's not yet clear whether it's voluntary or induced by tight credit conditions, he said.
In the end, it may be their baby boomer parents that millennials have to thank for their saving habits.
“My parents have always preached to save, save, save as much as you can,” Mr. Gentry said. “I knew that to just start saving and preparing for that now would make life a lot easier down the road.”