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

11/01/2007

This section looks briefly at trends in real net worth as reported in the Survey of Consumer Finances (SCF) 19922004 surveys. Overall, families mean net worth saw real growth of 72 percent over the 19922004 while median net worth grew 32 percent. Exhibit 17 shows trends in median real net worth by education, race, and housing status. The trends are not as promising for less educated and renter families. Families headed by persons without a high school diploma saw their net worth decline 16 percent from $24,600 to $20,600. By contrast, college graduates saw a 74 percent increase at the median (from $129,800 to $226,100). The median net worth of nonwhite or Hispanic families rose 57 percent (from $15,800 to $24,800), while for white families it grew 53 percent (from $91,900 to $140,700). Renters saw up-and-down growth in their median net worth over time, down 5 percent overall (from $4,200 in 1992 to $4,000 in 2004), while homeowners saw growth of 44 percent (from $130,300 to $184,400). Appendix exhibit 6 provides additional trends in median and mean net worth by family characteristic.

Exhibit 17.
Trends in Total Median Net Worth by Family Characteristic, 1992-2004

Exhibit 17.  Trends in Total Median Net Worth by Family Characteristic, 1992-2004. See text for explanation.

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

Growth in median income over the same period appears encouraging for low-income groups at first blush, but when the growth rates are compared to the low initial income levels, the conclusion is less satisfactory. Exhibit 18 shows the percentage change in median income and net worth by income quintile for 19922004. Median income in all quintiles grew in the SCF at roughly the same rate  around 2328 percentage points depending on the quintile over 19922004. (The same pattern is seen for mean income  again, growth in each quintile is between 21 and 25 percent, except for the fifth quintile which grew 44 percent over the period.) The Census Bureaus historical income tables show a comparable change in household median income from 1992 to 2003 of 18 percent.[8] While income growth appears even, the reality is that a family that earns $20,000 per year and sees its income rise by 20 percent gains only $4,000, while a family that earns $100,000 per year and sees it income rise by 20 percent gains $20,000. A greater portion of the income growth for the family making $100,000 can be saved and used to purchase additional assets while the additional income for the family making $20,000 is more likely to go for current consumption and debt service. The second bar shows growth in net worth. While the robust growth (44 percent) in median net worth for families in the bottom quintile is encouraging, this growth rate must be placed against the back drop of absolute gains (in Appendix exhibit 6) that show median net worth for this group rising only from $5,200 to $7,500.

Exhibit 18.
Percentage Change in Real Median Income and Net Worth, 1992-2004

Exhibit 18.  Percentage Change in Real Median Income and Net Worth, 1992-2004. See text for explanation.

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

How did different groups fare in terms of the amount of income they were able to save? The SCF focuses on quantifying stocks of savings (assets and debts) and does not really address the flows from annual income into saving beyond querying families whether they saved or not. The SCF does not ask how much was saved, which would allow calculation of a savings rate. Reported saving is computed as the percentage of families that report spending less than their income over the year preceding the SCF survey. These results are presented in Exhibit 19. Looking at all families, the majority of families saved in each survey year over the last decade, although the percentage of savers remained relatively flat, at around 56 percent. The proportion of families in the bottom quintile that reported saving trended up very slightly over the 19922004 period (from 30 to 34 percent) while a somewhat declining fraction of families in the second and third quintiles saved. The fraction of families in the fourth and fifth quintiles who reported saving remained constant over time (about 70 percent and 78 percent, respectively). The percentage of families at the highest incomes that report saving are about double the percentage of families at the lowest income.

Exhibit 19.
Percentage of Families Who Report Saving, 1992-2004

Exhibit 19.  Percentage of Families Who Report Saving, 1992-2004. See text for explanation.

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

While overall net worth increased and the percentage of families that save remained relatively constant from 1992 to 2004, there is evidence that the amount saved is falling in the United States (Marquis 2002). A falling saving rate is not inconsistent with overall net worth increasing. In fact the wealth effect  in which increases in assets such as stock values and home equity stimulate consumption  is part of the explanation for falling personal savings (Marquis 2002).

The role of Social Security and Medicare in net worth. Estimates based on the Survey of Consumer Finances, as presented above, do not include Social Security or Medicare benefits. Social Security and Medicare benefits are difficult to measure (as discussed in the Appendix) and are not always considered assets in the same sense as private pension benefits or other investments. Social scientists debate whether Social Security and Medicare benefits constitute actual wealth. Recipients do not have property rights over their benefits, benefit levels and eligibility could be changed through legislation and/or regulation at any time, and benefits cannot be borrowed against or in many aspects bequeathed. Moreover, in the case of Medicare, the level of benefits received is dependent on the frequency and intensity of the medical services used. However, workers who pay into Social Security and become disabled receive disability benefits and survivors of working parents who pay into Social Security and die receive survivors benefits until the children reach age 18.[9]

Social Security and Medicare benefits alter the net worth picture substantially, if considered wealth. Together, they are the major source of wealth for most low- and middle-income families and over 90 percent of wealth for families with incomes below $25,000 (Kennickell and Sunden 1997; Lerman 2005). Similarly, Steuerle and Carasso (2004) find that Social Security and Medicare benefits comprise roughly 90 percent of households expected wealth for households in the bottom two wealth deciles (exhibit 20). Social Security and Medicare benefits are not just important for low-income households; they comprise half or more of households expected wealth for nearly 70 percent of households (the first through seventh deciles). Housing wealth, on the other hand, does not make a real contribution to total wealth until the sixth or seventh decile.[10] The bottom line is that, while very difficult to value  especially for younger households  Social Security and Medicare benefits, when considered wealth, contribute a substantial amount to household balance sheets in retirement.

Exhibit 20.
Mean Value and Composition of Household Net Worth Ages 51-61 by Net Worth Decile, 1992

Exhibit 20.  Mean Value and Composition of Household Net Worth Ages 51-61 by Net Worth Decile, 1992. See text for explanation.

Note: Private pension (which includes DB and DC pensions), Social Security, other financial (which includes IRA and Keoughs), and housing wealth data
come from Moore and Mitchell (2000), based on a sample of households from the Health and Retirement Survey in which at least one member was age 51-61 in 1992.
Medicare wealth is from Steuerle and Carasso (2004).

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