The wealth of the nation

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Last week, the Federal Reserve released a report on family finances and household net worth. As usual, press accounts focused on the fact that most Americans don't have significant wealth. The Fed report typically leads off by discussing the differences between the top and bottom income groups—though no one is locked into these groups over time—and pays relatively little attention to the differences in wealth between age groups. But of course this misses the biggest part of the story. Wealth accumulation is a lifetime project. In no society known to man do young people, aside from a handful of heirs, have significant net worth. We don't want young people to have significant wealth; they tend to squander it or, at best, patronize eccentric causes. But over the course of a lifetime, most Americans do accumulate significant net worth. The big story is how they are doing in this lifetime project.

The first news that the Fed presents is that net worth increased between 2001 and 2004, not as much as in 1998–2001—not surprisingly, given that the stock market bubble peaked and burst then—but still significantly. Moreover, the wealth of ordinary people increased more than that of the very rich.

"Median family real net worth in the 2001–04 period increased 1.5 percent, but mean net worth rose 6.3 percent. The increase in wealth appears to have been clearest in the middle income group." Mean net worth always tends to be much higher than median net worth, because mean net worth counts Bill and Melinda Gates's wealth in dollars, which hugely raises the national average, while median net worth counts the Gateses as only two individuals, balanced off quickly enough by any two individuals who have zero or negative net worth.

The Fed goes on to explain why this happened—and it's what you might imagine: Housing values rose faster than stocks. And more individuals own houses than own stocks. Here are the report's words:

Three key shifts in the 2001–04 period underlie the changes in net worth. First, the strong appreciation of house values and a rise in the rate of home ownership produced a substantial gain in the value of holdings of residential real estate. Second, despite the general recovery of prices in the equity markets since 2001, the direct and indirect ownership of stocks declined, as did the typical amount held. Third, the amount of debt relative to total assets increased markedly and the largest part of that increase was attributable to debt secured by real estate.

Refinancings, in other words: People monetized their residential real-estate wealth increase. No surprise to people who see the ditech.com and E-loan ads.

On Page 8 of the report, the Fed gives the numbers on wealth by demographic groups, including age groups. Let's focus here on the median figures, which give us a better idea of the wealth of the vast majority of Americans, rather than the mean figures, which are affected heavily by the very rich.

Among Americans under 35, family median net worth has risen little or not at all in recent years. It was $14,800 in 1995, $10,600 in 1998, $12,300 in 2001, and $14,200 in 2004. That's not particularly encouraging but not tremendously discouraging either. Remember that nearly half the people who were in this age group in 1995 were in the 35-to-44 group in 2004, a group that (as we shall soon see) has much higher net worth.

Here are the figures for ages 35 to 44: $64,200 in 1995, $73,500 in 1998, $82,600 in 2001, $69,400 in 2004. The 2004 number is not encouraging. But it's a lot higher than the 18-to-34 group's $14,800 in 1995.

Where we do start to see substantial increases in net worth is among people 45 and over. Start with the 45 to 54s: $116,800 in 1995, $122,300 in 1998, $141,600 in 2001, $144,700 in 2004. The increase from 2001 to 2004 is, admittedly, minimal: Housing price increases have barely compensated for stock price decreases. But compare the $144,700 in 2004 with the $64,200 in 1995 for what are pretty much the same people.

Then look at the 55 to 64s, when net worth peaks (because people start drawing it down after 65): $141,900 in 1995, $148,200 in 1998, $193,300 in 2001, $248,700 in 2004.

Increases are more modest among the 65 to 74s: $136,600 in 1995, $169,800 in 1998, $187,800 in 2001, $190,100 in 2004.

Finally the 75-and-olders: $114,500 in 1995, $145,600 in 1998, $161,200 in 2001, $163,100 in 2004.

Conclusion 1: Most Americans do accumulate significant wealth during the course of their lifetime. Americans 55 to 64 in 2004 had median wealth of $248,700. In other words, the ordinary person accumulated a quarter of a million dollars. That's not enough wealth to live on. But it doesn't include the present value of Social Security benefits or defined benefit pension plans.

Conclusion 2: Most Americans are continuing to enjoy significant wealth increases over time. The following table compares the wealth of people by age group in 2004 with the wealth of people in the age group 10 years younger in 1995. (These are not precisely the same people, because 2004 is only nine years after 1995, but the fit is pretty close.) I'll classify them by birth years from the 2004 groups.

Birth yearWealth '95Wealth '04IncreasePercent increase1960–69$14,800$69,400$54,600367%1950–59$64,200$144,700$80,500125%1940-49$116,800$248,700$131,900113%1930-39$141,900$190,100$48,20034%1900-29$136,600$163,100$26,50019%The two oldest age groups have the lowest dollar increases in net worth—but they show increases in net worth, even though by 2004 they had all passed the traditional retirement age of 65, beyond which people tend to draw down net worth. Those born in the 1940s showed a whopping increase in net worth, in both dollar and percentage terms.

As for the two youngest age groups, those born in the 1950s had a lower percentage increase in net worth, but in dollar terms their increase was greater than that of those born in the 1960s. And those people—of the age when home equity starts rising and college debts are paid off—showed a huge percentage increase and a rise in net worth from the negligible to something starting to be considerable.

Others have concentrated on other numbers. The Federal Reserve reports that those under the 25th percentile of net worth have a median net worth of $1,700—essentially nothing. And from the 25th to the 50th percentile, the median net worth is $43,600—not much. But of course these groups are heavily tilted toward the young. Among those in the 50th to 75th percentiles, the figure is $170,700; in the 75th to 90th percentile, $506,800; in the 90th to 100th percentile, $1,430,000. If you had told me when I was growing up that more than 1 in 10 Americans would be millionaires, I would have thought you were crazy. But that's America today.

Over the past several years, I have been one of those arguing that since most Americans accumulate wealth over the course of a lifetime, and since most American voters are part of the investor class, voters would tend to favor individual investment accounts in Social Security. That proposal proved a political failure in 2005, because of the down-the-line opposition by Democrats, queasiness on the part of House Republicans, and the fact that Hurricane Katrina ended any chance that Ways and Means Chairman Bill Thomas would bring a proposal before the House. Public opinion on the underlying arguments, I would argue, remains favorable to such a proposal. But perhaps less than I thought: The decline in stock ownership as measured by the Federal Reserve is perhaps one reason there was little perceptible demand from voters for it. Voters can accept something but still not demand it.

In any case, wealth accumulation in significant amounts still remains the norm for most Americans—despite the popping of the stock market bubble, despite the 2000–01 recession, despite September 11 and its grievous effect on the economy. For all the grumbling about the economy, ordinary Americans go on accumulating wealth at a rate that, if you put it in historic perspective, is awe inspiring.