The Economic Impact of Gen Z's Financial Woes

Have you ever wondered how the financial struggles of today’s youth could shape the future of our economy? For many in Gen Z, the dream of financial stability feels increasingly out of reach.

Gen Z faces a unique set of financial challenges that are shaping not only their future but the broader economic landscape of Australia. With rising costs of living, stagnating wages, and overwhelming debt, young Australians are finding it harder to achieve traditional financial milestones like homeownership, savings, and wealth accumulation. These struggles are creating ripple effects across key sectors of the economy—from housing to entrepreneurship—while also exacerbating long-term issues like intergenerational inequality and mental health.

This article explores 10 critical insights into how Gen Z’s financial woes are influencing Australia's economic future and the potential risks that lie ahead.

1. Rising Personal Debt and Financial Strain

With inflation and the cost of living rising faster than wages, many young Australians are increasingly relying on personal debt—such as credit cards, buy now pay later services, and personal loans—to cover essential short-term expenses or gain temporary relief in managing their cash flow.

An ASIC study shows Gen Z is significantly more likely than older generations to use buy now pay later products (28% compared to 21%). One in four Gen Z individuals (25%) have less than $1,000 in personal savings, with 8% having no savings at all. On average, Gen Z reports personal debt levels of $8,188—considerably higher than non-Gen Z counterparts, who average $6,730. And one in five (21%) carry personal debt exceeding $10,000, and 4% owe over $50,000.

Following the COVID-19 pandemic, we can see how a relatively short-term fix can disproportionately impact the long-term financial stability and wellbeing of young people, especially for those just entering the economy. The path for getting out of debt or even thinking about trying to get ahead, gets less and less clear for these young people just starting out.

Paradoxically, while HECS debt is designed to provide individuals with better opportunities, those carrying this debt are often less likely to achieve homeownership or attain a higher socioeconomic status compared to those without it.

The heavy reliance on debt threatens the long-term financial stability of the economy, leading to higher interest rates and economic vulnerability. We will see a further reduction in consumer spending and increased ability to invest in wealth building assets.

2. Stagnating Consumer Spending and Declining Savings

As living costs soar, discretionary income shrinks. Younger Australians have pulled back on their spending more than any other age group. Gen Z is spending a larger proportion of their income on essentials like rent, utilities, and food, leaving less for discretionary purchases such as entertainment, dining out, or travel.

The latest Commbank IQ Cost of Living Insights Report reveals that individuals aged 25-29 have cut their spending by 3.5% compared to last year, making them the only age group to reduce both essential and discretionary expenses. When adjusted for inflation, their overall consumption has dropped by more than 7% since May 2023. While most Australians have reallocated their budgets to accommodate rising costs for essentials like insurance, healthcare, and groceries, those aged 25-29 have decreased spending on both essentials (-3.1%) and discretionary items (-3.8%).

A prolonged decrease in consumer spending, particularly among young Australians, is likely to have widespread economic repercussions. Key sectors that fuel the Australian economy, such as retail and hospitality, could experience significant revenue declines, potentially resulting in job losses and a slowdown in economic growth.

3. The Rental Crisis and Housing Insecurity

With homeownership increasingly out of reach, more Gen Z Australians are renting or living with their parents for longer periods. Rising rents, particularly in the suburbs, are forcing many to live with financial insecurity, and it’s becoming harder to find affordable housing without sacrificing other necessities.

The surge in rental demand is contributing to inflationary pressures in the housing market, further driving up prices and exacerbating the cost of living crisis. Increased rental expenses reduce disposable income, limiting consumer spending and economic productivity. In turn, this could create a ripple effect on the broader economy, as young people have less money to spend on goods and services, causing slowdowns in various industries.

4. Reduced Wealth Accumulation and Widening Intergenerational Inequality

Unable to purchase homes or make significant investments, Gen Z is missing out on crucial wealth-building opportunities. The delay in asset accumulation deepens the wealth gap between younger and older generations, intensifying intergenerational inequality. Older generations who benefitted from more affordable housing markets and stronger economic growth have built substantial wealth, while many Gen Z individuals struggle to build similar financial security.

The widening wealth gap could lead to a divided economy where fewer young Australians are able to achieve financial independence. Over time, this could reduce social mobility, as young people lack the resources to invest in education, property, or other wealth-generating activities. This divide may also contribute to political and social instability, as economic inequality often fuels discontent and reduces the overall cohesion of society.

5. Delayed Life Milestones

Due to financial pressures, many Gen Z individuals are delaying important life milestones such as buying their first property, starting families, or pursuing higher education. This delay is largely driven by high housing costs, student debt, and stagnant wages, which make these major financial commitments seem unattainable for many young Australians.

The delay in these milestones has broader economic implications, as the reduced demand for housing and consumer goods slows economic growth, while fewer births contribute to demographic shifts that could create long-term workforce shortages. Lower participation in higher education may also impact the country's future economic productivity, as fewer people will have the skills required for an evolving job market.

6. Entrepreneurship at Risk: A Generation Hesitant to Innovate

The high cost of living, minimal savings, and economic uncertainty are discouraging Gen Z from taking entrepreneurial risks. Starting a business requires significant financial investment, which many young Australians simply cannot afford. Instead of exploring new business ideas or innovations, they may opt for safer, more traditional career paths to ensure financial stability.

Entrepreneurship drives job creation, fosters competitive industries, and leads to new technological advancements, and the hesitation to innovate could have long-term consequences for Australia's economy. If Gen Z is too financially constrained to start businesses or take risks, the country could miss out on a wave of innovation, slowing the growth of new industries that are crucial for maintaining a dynamic and adaptable economy. Without fresh ideas and enterprises, economic growth could stagnate, leading to fewer job opportunities and reduced competitiveness on the global stage.

7. Increased Economic Dependence on Government Support

As wages fail to keep pace with rising costs, more Gen Z Australians will become more dependent on government subsidies and support programs. This includes unemployment benefits such as Job Seeker, rent assistance, and other social safety nets that are essential for many young people to make ends meet in an increasingly expensive environment.

This increased reliance places greater pressure on government spending as welfare and support programs will grow. In the long term, this may lead to higher taxes or reduced government services as policymakers try to balance budgets. The cycle of dependence could weaken economic resilience, as young people become trapped in financial precarity with fewer opportunities to escape poverty or build wealth.

8. The Shrinking Middle Class

The high cost of living is hollowing out Australia's middle class, particularly among Gen Z. Many young Australians, despite having higher education qualifications, are finding themselves stuck in low-income or stagnant wage brackets. The traditional path to middle-class stability—buying a home, securing a well-paying job, and saving for the future—is becoming increasingly difficult to achieve.

A shrinking middle class poses a significant risk to Australia's long-term economic stability. Middle-income earners are historically the primary drivers of consumption and investment in areas such as housing, education, and consumer goods. Without a strong and growing middle class, demand for these sectors will weaken, stifling economic growth. The erosion of the middle class also reduces social mobility, as fewer young people can access the resources necessary to improve their financial standing. Over time, this could lead to a more polarised society, with greater inequality and reduced opportunities for economic advancement across generations.

9. Mental Health Crisis and Productivity Decline

The financial pressures of living paycheck to paycheck, coupled with overwhelming debt and housing insecurity, have led to a growing mental health crisis among Gen Z. High levels of stress, anxiety, and depression are becoming more common as young Australians grapple with an uncertain financial future.

Mental health issues have a direct impact on workplace productivity and participation. Stressed and anxious employees are less likely to perform at their best, leading to lower economic output. Furthermore, the healthcare system faces additional costs for mental health treatment, which diverts resources from other areas of the economy. Over time, untreated mental health issues could contribute to long-term labour market disengagement, further weakening Australia's economic productivity.

10. Challenges for Retirement Preparedness

With limited opportunities to save or invest, Gen Z faces significant challenges in preparing for retirement. Many young Australians may enter retirement with inadequate savings or superannuation, relying more heavily on government pensions and support in their later years.

The Association of Superannuation Funds of Australia estimates a single person needs approximately $595,000 saved by age 67 to retire comfortably, while couples should aim for around $690,000. Without the Super Guarantee system in Australia, achieving a comfortable retirement would be nearly impossible for most young individuals.

This shift places additional strain on public resources as more people depend on government support during retirement. With an aging population and fewer young workers contributing to the economy, the financial burden on public pensions could lead to unsustainable deficits or cuts in other vital services. Additionally, the lack of personal savings among Gen Z could create a generation vulnerable to poverty in retirement, further exacerbating economic inequality.

Gen Z's financial struggles are more than personal setbacks; they represent a broader economic issue with significant impacts on Australia's future.

The rising personal debt and reduction in consumer spending and entrepreneurship are impacting the key pillars of economic growth and stability. If left unaddressed, these issues could deepen the wealth inequality, reduce social mobility, and weaken the middle class, leading to a more polarised society.