Wednesday, June 13, 2012

Elvis Has Left the Building

That's a metaphor, of course. By Elvis, I mean the wealth of the middle class.

I don't think it's possible to overstate the bad news in the household wealth numbers released by the Federal Reserve Board. Sure, we knew things were bad. But until the data were in our hands, we could at least hope that Elvis would return to the stage. That hope is gone. Median household net worth fell 39 percent between 2007 and 2010, after adjusting for inflation. The $77,300 median of 2010 was at the level of 1992. See my discussion of household net worth trends by age here, by income here.

The loss of family wealth is a problem that will be passed down (or, rather, not passed down) from one generation to the next. The loss of wealth destabilizes the middle class because it removes the safety net required to remain there. That safety net is the ability of families to lend (or give) a helping hand to family members when they encounter inevitable (and, according to research, increasingly frequent) economic shocks--medical bills, car repairs, unemployment, etc. The 2010 wealth data show gaping holes in the safety net ...
  • The oldest Americans are now the wealthiest householders. Median net worth in 2010 peaks among householders aged 75 or older, at $216,800. This is a change from 2007, when median net worth peaked in the younger 55-to-64 age group. By rights, 55-to-64-year-olds should have the greatest net worth, spending it down in retirement. But the net worth of householders aged 55 to 64 was just $179,400 in 2010, much lower than their $266,200 net worth in 2007--a 33 percent decline after adjusting for inflation.
  • It's a bad sign that median household net worth has fallen to the level of 1992. In that year, the large baby-boom generation was aged 28 to 46, with the oldest entering their peak-earning years. The small Depression-era cohort was then at the age of peak wealth accumulation prior to retirement. At that time, the demographic structure of the population was suppressing median net worth. In 2010 in contrast, the baby-boom generation is at the supposed age of peak wealth accumulation. The demographic structure of today's population should be boosting net worth. With net worth at the 1992 level despite the demographics suggests worse is to come as boomers age.
  • The devastating loss of wealth experienced by younger householders means there's no rescue in sight. Householders aged 35 to 44 lost most of their wealth between 2007 and 2010, their median net worth falling by 54 percent after adjusting for inflation, to just $42,100. Householders under age 35 saw their already small nest egg fall by 25 percent during those years, to $9,300. Home equity is the foundation of middle class wealth, which is why the drop in home values is the single biggest factor behind the decline in net worth. The dire financial straits of householders under age 45, coupled with the desire of millions of boomers to downsize, will depress housing prices for years to come. 
Source: Federal Reserve Board, Federal Reserve Bulletin, Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances

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