are we headed for a poorer united states? · are we headed for a poorer united states 2. t he...

Are we headed for a poorer United States? Growing wealth inequality by age puts younger households behind

Are we headed for a poorer United States?

The young and the asset-less | 2

As wealth has grown, so has inequality | 3

Generational wealth differences are widening | 5

Income divergence partly explains young households’ declining wealth | 7

Differences in stockholdings also contribute to wealth inequality | 8

Homeownership benefits wealth—but is on the decline | 10

A poorer United States? | 12

Endnotes | 14

CONTENTS

Growing wealth inequality by age puts younger households behind

1

UNFORTUNATELY, many of Jacob’s country-men did not enjoy the same prosperity. The rising tide of commerce and political influ-

ence may have lifted the boats of Jacob and a few more, but many others of that time and place didn’t even have a rickety raft, let alone masterfully craft-ed boats. Naturally, they got left behind.

Though much has changed since the time of Jacob Fugger, unequal distribution of wealth re-mains a hallmark of modern societies. In the United States, particularly, the wealth gap between the rich and the poor has been increasing over the past two decades. Yet that is not the only trend that is of concern. Equally worrisome is the fact that today’s younger households are not faring as well as young households of prior generations.

At first glance, this trend may appear surprising, given the United States’ current economic momen-tum. Unemployment is at a 17-year low, consumer confidence is high, and forecasts predict continued moderate GDP growth.2 More importantly, asset prices are on a broad upswing, with stock and home

prices either at all-time highs or headed in that di-rection.3

So why are surging asset prices not pushing up younger Americans’ wealth by as much as their older counterparts’? The answer is quite simple if one takes the time to pore over the United States Federal Reserve’s Survey of Consumer Finances (SCF). The SCF data reveals that young Americans do not hold as many assets as those in their parents’ generation. Hence, they are losing out during the recent rally in asset prices. After all, to benefit from growth in stock and housing values, one needs to own stocks or a home.

This generational difference in wealth may have significant implications. From an individual per-spective, many younger Americans with neither significant assets nor the resources to invest them will find it more difficult to improve their economic and financial situation than those with more as-sets. Worse, if the wealth gap persists, it may set the stage not only for an increasingly unequal United States, but also for a poorer one.

The young and the asset-less

If you are feeling smug about a recent spurt in your wealth due to rising stock and home prices, you may feel an affinity for a certain Jacob Fugger. Jacob the Rich, as he is better known, didn’t make it big in Silicon Valley or Wall Street—but through commerce, commodities, and a close relationship with his coun-try’s political leaders (the ruling Habsburgs of 15th- and early 16th-century Germany), he nonetheless amassed a fortune estimated at about $400 billion, more than any billionaire today.1


2

THE latest SCF data shows that real (inflation-adjusted) median family net worth went up by 15.9 percent between 2013 and 2016 to

$97,290, although this value remains below the 2007 level ($140,120).4 Rising overall wealth, how-ever, does not mean that all households have got-ten richer at the same pace. Figure 1 shows that real mean family net worth has been consistently higher than real median family net worth since be-fore 1992, with the gap widening over the years: The

ratio of the mean to the median value has gone up from 3.8 in 1992 to 7.1 in 2016. This divergence be-tween mean and median values chronicles the rise in wealth inequality over the years.5

Comparing higher-income households to low-er-income ones confirms the suspicion of growing wealth inequality, which outstrips even the growth in income inequality. In 1992, for example, the me-dian household in the top-10-percent income brack-et was worth 92.6 times as much, in real terms, as

As wealth has grown, so has inequality

Deloitte Insights | deloitte.com/insights

Source: United States Federal Reserve (Survey of Consumer Finances); Deloitte Services LP economic analysis.

Figure 1. Growth in real mean family wealth has outpaced that of real median family wealth

0

100

200

300

400

500

600

700

800

$ thousand

1992 1995 1998 2001 2004 2007 2010 2013 2016

Real median family net worth Real mean family net worth


3

the median household in the bottom 20 percent of the income distribution. By 2016, however, that ra-tio had shot up to 248.4.

The difference is even starker when we compare households by wealth. In 2016, the median family net worth among the wealthiest 10 percent of US households was $2,386,500, about 23,865 times

the net worth of the bottom 25 percent (figure 2). Again, this ratio is much higher than it was in 1992 (1,334). Moreover, during 1992–2016, real median family net worth fell by 8.5 percent per year on av-erage among the bottom 25 percent of households—the only category to have experienced a decline in net worth.


Note: The 2010 and 2013 figures for “Less than 25” are less than $50 and hence not given in the survey. Source: United States Federal Reserve (Survey of Consumer Finances); Deloitte Services LP economic analysis.

Figure 2. The gap between the wealthiest and the poorest has kept increasing

0

500

1,000

1,500

2,000

2,500

3,000

$ thousand

1992 1995 1998 2001 2004 2007 2010 2013 2016

Less than 25 25–49.9 50–74.975–89.9 90–100

Real median family net worth by percentile of net worth


4

THAT high-income American households are getting wealthier faster than those at the bot-tom has been widely noted in previous stud-

ies.6 Less frequently discussed is that wealth levels also vary by age, and the gap between younger and older households is also widening over time.

In 2016, real median family net worth among households with a head of household less than

35 years old stood at $11,000, much lower than that among households with heads in the 65–74 ($224,000) and 75-or-older ($264,000) age groups. While this gap in wealth is natural, as older house-holds have had more years to earn income and ac-cumulate assets, what is worrisome is the increase in the gap over time (figure 3). In 1992, for example, the ratio of real median family net worth among

Generational wealth differences are widening



Figure 3. Households led by younger people hold much less wealth than those led by older individuals

0

50

100

150

200

250

300

350

$ thousand

1992 1995 1998 2001 2004 2007 2010 2013 2016

Real median family net worth by head of household age in years

Less than 35 35–44 45–5455–64 65–74 75 or more


5

households headed by those 75 or more years old to that of households headed by those under 35 years old was 9.4. By 2016, that ratio had increased to 24.1. During this period, real median fam-ily net worth actually fell by 1.4 percent on average per year for households headed by those under 35 years of age, the sharpest decline for any age group; only the 65–74 and 75-or-older age groups witnessed an average increase in wealth during the same pe-riod.

The overall steady increase in the wealth gap be-tween younger and older households was amplified during the Great Recession, which dented many

younger households’ asset values more. For example, households headed by those in the under-35 age group saw their real me-

dian family net worth decline by 8.8 percent annually, on average, be-tween 2007 and 2010. Households

headed by those aged 65–74 years and 75+ years, while not immune, wit-nessed a smaller decline in wealth on a percentage basis.


6

A KEY reason behind growing wealth differ-ences between households in different age groups is divergent income growth. Among

households headed by people under 35 years of age, real median before-tax family income has fallen at an average of 0.1 percent per year between 1992 and 2016. In contrast, all other households except the 45–54-year-old age group (-0.04 percent aver-age annual decline) witnessed gains in real median before-tax family income during this period.

Moreover, the average growth figures mask some of the upheavals witnessed after the Great Recession, especially among younger households. Households headed by those under 35 years of age saw their real median before-tax family income de-cline by 3.8 percent per year, on average, during 2007–2010, the sharpest fall among all age groups. And the recovery rate among these young house-holds since then has not been noticeably faster than that of other households (figure 4).

Income divergence partly explains young households’ declining wealth



Figure 4. Incomes for the youngest households declined, on average, between 1992 and 2016

-4

-2

0

2

4

6

1992–2001 2001–2007 2007–2010 2010–2016

Average annual percentage growth in real median before-tax family income by headof household age

Perc

ent g

row

th

Less than 35 35–44 45–54 55–64 65–74 75 or more


7

INEQUALITY in wealth distribution also results from stock market movements and how much of their wealth families hold in equities.7 A quick

look at household stockholding patterns by house-holder age reveals some interesting insights.

First, the share of households that have stock-holdings goes up with the head of household’s age before declining again. For example, in 2016, out of all households led by those under 35 years old, only 41.1 percent had stockholdings. That figure goes up steadily with increasing householder age before go-ing down among households headed by those in the

65–74 and 75-or-older age groups. This decline in stock ownership among elderly households is not surprising: As people approach retirement, their fo-cus shifts to less riskier assets, and after retirement, most households also draw down their savings to cover their expenses.8

Second, while many households have once again started adding stocks to their portfolios after burn-ing their fingers during the Great Recession, house-holds headed by those under 35 years of age have been slower to do so than households in other age groups (figure 5). The revival in households’ stock-

Differences in stockholdings also contribute to wealth inequality



Figure 5. The share of families holding stocks has increased over the long term

20

30

40

50

60

70

%

1992 1995 1998 2001 2004 2007 2010 2013 2016

Less than 35 35–44 45–5455–64 65–74 75 or more

Percentage of families with stockholdings by head of household age in years


8

holdings since 2010 and a steadily increasing stock market has meant that, overall, the real median value of household stockholdings has increased in the past few years. However, because households in the under-35 age group have been the slowest to add stocks to their portfolio, their stockholdings’ median value has grown the least (figure 6), contrib-uting to the widening wealth gap between younger and older households.

Finally, despite the revival of equities in house-hold portfolios since 2010, the percentage of house-holds with stockholdings overall is still lower than the figure before the Great Recession. Specifically, the percentage of households holding stocks in all household age groups is still lower than in the peak years of 2004–2007, except among the 75+ age group (figure 5). On a positive note for stock owner-ship, however, figure 5 also shows a general upward trend since 2013.


* Among households that have stockholdings.Source: United States Federal Reserve (Survey of Consumer Finances); Deloitte Services LP economic analysis.

Figure 6. The real value of stockholdings has increased the least for the under-35 age group

0

30

60

90

120

150

180

210

$ thousand

1992 1995 1998 2001 2004 2007 2010 2013 2016

Less than 35 35–44 45–5455–64 65–74 75 or more

Real median value of household stockholdings* by head of household age in years


9



Figure 7. Homeownership has declined for all household age groups except the elderly

30

40

50

60

70

80

90

%

1992 1995 1998 2001 2004 2007 2010 2013 2016

Less than 35 35–44 45–5455–64 65–74 75 or more

Percentage of families owning a primary residence by head of household age in years

EVEN before the Great Recession, homeowner-ship began to lose some of its luster. The share of US families having a primary residence as an

asset fell from a peak of 69.1 percent in 2004 to 63.7 percent in 2016. And housing appears to have fallen out of favor across all generations—except among the elderly. Between 2010 and 2016, the percentage of homeowners fell among all household age groups, declining most for the 44–54-year-old age group (by 6.4 percentage points), the 35–44-year-old age

group (6.0 percentage points), and the under-35 age group (4.4 percentage points). In contrast, the percentage of homeowners among households headed by an individual aged 75 or more rose from 81.9 percent to 83.1 percent during the same period.

Interestingly, while the Great Recession wreaked havoc on homeownership for many households, es-pecially those with subprime mortgages, the slide in the overall homeownership rate started even earlier. Among some household age groups, homeowner-

Homeownership benefits wealth—but is on the decline


10

ship has been edging down since 2001–2004 (fig-ure 7), with the downturn of 2008–2009 taking the shine off housing even more.

For most homeowners, the real median value of their primary residence went up between 2013 and 2016. However, these values continue to be below what they were in 2004–2007, prior to the Great Recession (figure 8). And young households were

hit the hardest by the downturn in home equity. For example, during 2007–2010, among all families that owned a primary residence, the real median value of these residences fell the most for house-holds headed by those under 35 years of age. This, too, has likely exacerbated the wealth differential between younger and older households over time.


* Among households that own their primary residence.Source: United States Federal Reserve (Survey of Consumer Finances); Deloitte Services LP economic analysis.

Figure 8. Real median value of home equity is still below 2007 levels for most households

100

120

140

160

180

200

220

240

260

280$ thousand

1992 1995 1998 2001 2004 2007 2010 2013 2016

Less than 35 35–44 45–5455–64 65–74 75 or more

Real median value of primary residence of households by head of household age in years*


11



Figure 9. Households led by younger people do not seem very keen on business equity

0

5

10

15

20

25

%

1992 1995 1998 2001 2004 2007 2010 2013 2016

Less than 35 35–44 45–5455–64 65–74 75 or more

Percentage of families holding business equity by head of household age in years

WITH the disparity in net worth and income accelerating, the plight of the “have-nots” has worsened. However, today’s “have-

nots” are not just the poor; they are also, on average, the young. It remains to be seen if younger Ameri-cans’ lower relative income and wealth continue to follow them as they age. If that happens, what then?

One worrisome trend that hints at a less robust future is that younger households are much less likely to have business equity as an asset than were

younger households in earlier generations. For ex-ample, in 1992, when about half of the baby boomers likely belonged to households headed by someone under the age of 35, 10.6 percent of under-35-year-old households held some sort of business equity as an asset (figure 9). By 2016, however, the pro-portion of under 35-year-old households that held business equity had fallen to 5.6 percent. Perhaps, following the recession, today’s younger households are less entrepreneurial than prior generations due

A poorer United States?


12

to greater risk aversion. However, there is another explanation: Given their lower wealth and income levels, today’s younger households may simply not be as well-positioned to start their own business as were young people in the 1990s or the early 2000s. Or perhaps, for many young Americans, the busi-nesses they are able to start fall under the category of “gig economy” jobs—self-employment that pays the bills, but does not neces-sarily pave the way to growing a new business.

With lower incomes and perhaps a change in preferences affecting their ability and willingness to acquire assets, such as stocks or homes, or even to start their own businesses, it is not clear that today’s younger households will ever be able

to achieve the wealth levels of today’s older house-holds. This would complicate the already tricky question of how to fund social safety nets such as Social Security and Medicare in a way that is equita-ble across generations. Further, since the vibrancy of the US economy has historically relied on new business formation—especially of businesses whose

founders aspire to grow significant-ly—a dampening of the ability to generate owner equity in high-growth new business may well slow job creation and innovation.9

If that indeed becomes the case, the generation gap in wealth and income, far from being only a young person’s problem, may lead to a poorer future

for the United States overall.


13

1. Greg Steinmetz, The Richest Man Who Ever Lived: The Life and Times of Jacob Fugger (Simon & Schuster), accessed January 2018; Daniel Eckert, “This is how Jakob Fugger became the wealthiest person in history,” Die Welt, June 6, 2016.

2. Haver Analytics, accessed January 2018; Dr. Daniel Bachman and Dr. Rumki Majumdar, United States economic forecast: 4th Quarter 2017, Deloitte Insights, December 12, 2017.

3. Haver Analytics, accessed January 2018.

4. United States Federal Reserve, Survey of Consumer Finances, accessed January 2018. All data in this report is sourced from the Survey of Consumer Finances unless otherwise stated.

5. When the mean and median do not keep pace with one another, inequality is expected to rise with the distribu-tion. In the case of mean and median family net worth, while the former has increased by 3.3 percent during 1992–2016, the pace of increase in the median has been much slower (0.6 percent).

6. Daniel Bachman, Income inequality in the United States: What do we know and what does it mean?, Deloitte Uni-versity Press, July 12, 2017; United States Federal Reserve, Survey of Consumer Finances, accessed January 2018.

7. Matthieu Gomez, “Asset prices and wealth inequality,” Princeton University, accessed January 2018.

8. Franco Modigliani, “Life cycle, individual thrift, and the wealth of nations,” Massachusetts Institute of Technology, accessed January 2018; Pu Shen, “How long is a long-term investment,” Federal Reserve Bank of Kansas City, accessed January 2018.

9. For a discussion of the role “transformational” entrepreneurs play in the US economy, see James Surowiecki, “Why startups are struggling,” MIT Technology Review, June 15, 2016.

ENDNOTES


14

PATRICIA BUCKLEY

Patricia Buckley, based in Arlington, VA, is managing director for economics at Deloitte Services LP.

AKRUR BARUA

Akrur Barua is an economist with Deloitte’s Research & Eminence team. He is located in Mumbai.

ABOUT THE AUTHORS

CONTACTS

Dr. Patricia BuckleyManaging directorDeloitte Services LP+1 571 814 [email protected]

Akrur BaruaDeloitte Services LPIndia1 678 299 [email protected]


15

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