The Balance Sheets of Low-Income Households: What We Know about Their Assets and Liabilities. Net Worth

11/01/2007

Net worth, or wealth, is used to describe the relationship between asset and debt holdings and is simply assets minus debts. Exhibit 11 shows the distribution of net worth by income quintile. The bottom quintile, at a median value of $7,500, has about one-fifth the wealth of the second quintile, one-eighth of the wealth in the third quintile, and one-seventeenth of the fourth quintile. The distribution of net worth by income is more skewed between the lowest and highest than the distribution of assets, presumably because families in the highest income quintile are more likely to hold financial wealth like stocks that do not carry corresponding liabilities.

Exhibit 11.
Median Net Worth by Income Percentile, 2004

Exhibit 11.  Median Net Worth by Income Percentile, 2004. See text for explanation.

Income Percentile

Source: The Urban Institute. Data from Bucks et al. (2006) using the 2004 Survey of Consumer Finances.
Note: Breakout of income quintiles: Q1: <$18,000; Q2: $18,000-$31,999; Q3: $32,000-$51,999; Q4: $52,000-$85,999; Q5: >85,999.

Because debts are usually proportional to assets, the graphs of net worth by classifier resemble the graphs of assets by classifier, except the contrasts are even starker (see exhibits 3 and 12 and Appendix exhibit 6). First, age is clearly associated with net worth accumulation, as the median jumps from $14,000 for the families headed by persons under 35 to $69,000 for 35-44 year olds, before peaking at $249,000 for 55- to 64-year-olds. A similar relationship is seen for education of the family head, although, as with assets, families headed by persons who do not graduate from high school accumulate far less net worth ($21,000) than other groups, particularly those who graduate from college ($226,000). Nonwhite or Hispanic families have median net worth of just $25,000 compared with $141,000 for non-Hispanics whites  nearly six times more. Similarly, single-headed families have just $40,000 of net worth compared with $155,000 for married or cohabiting couples. Last, renters have much lower net worth than homeowners ($4,000 versus $184,000, respectively).

Exhibit 12.
Median Net Worth by Family Characteristic, 2004

(in thousands of 2004 dollars)

Exhibit 12.  Median Net Worth by Family Characteristic, 2004. See text for explanation.

Source: The Urban Institute. Data from Bucks et al. (2006) and Urban Institute tabulations using the 2004 Survey of Consumer Finances.

Accounting for age highlights the strong relationship between education and net worth. As Lermans (2005) exhibit based on SIPP data illustrates, net worth for all education categories is similar at ages 25-29 (exhibit 13). However, already by age 3034, net worth for college graduates is rising at a fast clip while net worth for those less educated remains little changed. By ages 45-49, median net worth for high school dropouts was just around $11,000. For households headed by persons without a high school diploma, it is only once the household head has reached his or her late 50s or early 60s that the household begins to accumulate net worth. By ages 6064, the median of these less-educated households had accumulated about $75,000 in net worth  an amount the median college graduate-headed family had accumulated before age 35.

Exhibit 13.
Age by Median Net Worth Profiles for Family Characteristic, 2001

(in 2004 dollars)

Exhibit 13.  Age by Median Net Worth Profiles for Family Characteristic, 2001. See text for explanation.

Source: Lerman (2005), tabulations from Wave 3 of the 2001 SIPP Panel.
Adjusted to 2004 dollars. In the bottom chart, marriage is defined as married at the time of Wave 3 of the survey.

Accounting for age also highlights the relationship between marital status and net worth (exhibit 13). Similar to the education findings, net worth accumulates more quickly with age for married couples than for single-headed households. By ages 6064, single-female-headed and male-headed households had accumulated $55,600 and $74,500 in net worth at the median, respectively, while married-couple-households had amassed $201,000.[7]

While married families of any racial or ethnic group have higher net worth than other family types, nonwhite or Hispanic families of all family types accumulate less net worth than white non-Hispanics. Exhibit 14 comes from Lupton and Smith (1999) based on the 1992 HRS (price-adjusted here to 2004 dollars) which only surveys households headed by respondents 50 years old and above. Because the HRS sample is older, these portraits also essentially control for most of the aging patterns in the data. Overall median net worth is $132,000. We see both household type and race/ethnicity patterns acting in concert. Generally, the divorced or never married have lower median net worth than other household types while married households have the highest. Within married couples, blacks ($77,900) and Hispanics ($66,400) accumulate less than whites ($187,300).

Exhibit 14.
Median Net Worth by Marital Status and Race, 1992

Exhibit 14.  Median Net Worth by Marital Status and Race, 1992. See text for explanation.

Family Type (With Family Head Age 50 or Over)

Source: Lupton and Smith (1999), based on the 1992 HRS. Adjusted to 2004 dollars.

 

While the median net worth for everyone drops off sharply within the unmarried couple types  cohabiting partners, divorced, widowed, or never married  blacks and Hispanics fare especially poorly. For example, blacks and Hispanics who are divorced have $17,300 and $6,300 respectively, compared with $51,400 for whites; and blacks and Hispanics who are widowed have $14,600 and $11,300, respectively compared with $86,600 for whites.

A subgroup of concern is households with negative net worth (debts exceeding assets). Based on the 2001 SIPP and using means rather than medians, Lerman (2005) finds that nearly 20 percent of households age 2544 have negative net worth, and that this varies little by education (exhibit 15). Among households age 4564, 8.5 percent have negative net worth, with slightly higher rates for those without a high school diploma and slightly lower for college graduates. Even while these older households were about half as likely to have negative net worth, their deficit was larger than for the younger households, on average. There is no clear trend in negative net worth by education for either age group, other than generally higher levels of assets and debts for the older group. Lerman also notes that renters were twice as likely to have negative net worth as homeowners, but that the levels of assets and debts involved for renters were lower than those for homeowners. It would be important to explore more fully what family characteristics seem to be associated with negative net worth.

Exhibit 15.
Households with Negative Net Worth, by Age and Education, 2001

Exhibit 15.  Households with Negative Net Worth, by Age and Education, 2001. See text for explanation.

Source: Lerman (2005). Based on data from wave 3 of the 2001 SIPP. Adjusted to 2004 dollars.

Asset poverty. Going beyond negative net worth, Caner and Wolff (2004) offer a definition of asset poverty and find steep rates of this kind of poverty for the young, the less educated, renters, and the unmarried, relative to other groups (exhibit 16). The Caner and Wolff concept defines asset poverty as having only enough liquid assets to last three months at the federal income poverty level and draws on data from PSID families. Caner and Wolff actually use two asset poverty measures here  one that includes all net worth and one that subtracts out home equity to better arrive at a measure of liquidity. The net worth minus home equity measure always gives markedly higher asset poverty rates. (Caner and Wolff 2004)

Exhibit 16.
Asset Poverty Rates by Family Characteristic, 1999

Exhibit 16.  Asset Poverty Rates by Family Characteristic, 1999. See text for explanation.

Source: Based on data and calculations from Caner and Wolff (2004) using the 1984-99 PSID.

Asset poverty rates are high (above 80 percent) at young ages then decline steeply at older ages, for example by more than half from the under 25 age group to the 3549 age group. Being nonwhite raises the likelihood of being asset poor by 3137 percentage points. Lacking a high school diploma, compared with graduating college, raises the likelihood of asset poverty some three-and-a-half times while renting instead of owning a home is associated with asset poverty rates 40-60 percentage points higher. Finally, female single-headed households under age 65 are far more likely than all other family types to be in asset poverty. Caner and Wolff (and before them, Haveman and Wolff, 2001) are the first to develop measures of asset poverty.

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