US wealth gap between young and old is widest ever

[Dark Silver]

Associated Press via Yahoo News

WASHINGTON (AP) — The wealth gap between younger and older Americans has stretched to the widest on record, worsened by a prolonged economic downturn that has wiped out job opportunities for young adults and saddled them with housing and college debt.
The typical U.S. household headed by a person age 65 or older has a net worth 47 times greater than a household headed by someone under 35, according to an analysis of census data released Monday.

While people typically accumulate assets as they age, this wealth gap is now more than double what it was in 2005 and nearly five times the 10-to-1 disparity a quarter-century ago, after adjusting for inflation.

The analysis by the Pew Research Center reflects the impact of the economic downturn, which has hit young adults particularly hard. More are pursuing college or advanced degrees, taking on debt as they wait for the job market to recover. Others are struggling to pay mortgage costs on homes now worth less than when they were bought in the housing boom.

The report, coming out before the Nov. 23 deadline for a special congressional committee to propose $1.2 trillion in budget cuts over 10 years, casts a spotlight on a government safety net that has buoyed older Americans on Social Security and Medicare amid wider cuts to education and other programs, including cash assistance for poor families. Complaints about wealth inequality, high unemployment and student debt also have been front and center at Occupy Wall Street protests around the country.

"It makes us wonder whether the extraordinary amount of resources we spend on retirees and their health care should be at least partially reallocated to those who are hurting worse than them," said Harry Holzer, a labor economist and public policy professor at Georgetown University who called the magnitude of the wealth gap "striking."

The median net worth of households headed by someone 65 or older was $170,494. That is 42 percent more than in 1984, when the Census Bureau first began measuring wealth broken down by age. The median net worth for the younger-age households was $3,662, down by 68 percent from a quarter-century ago, according to the Pew analysis.

Net worth includes the value of a person's home, possessions and savings accumulated over the years, including stocks, bank accounts, real estate, cars, boats or other property, minus any debt such as mortgages, college loans and credit card bills. Older Americans tend to hold more net worth because they are more likely to have paid off their mortgages and built up more savings from salary, stocks and other investments over time. The median is the midpoint, and thus refers to a typical household.

The 47-to-1 wealth gap between old and young is believed by demographers to be the highest ever, even predating government records.

In all, 37 percent of younger-age households have a net worth of zero or less, nearly double the share in 1984. But among households headed by a person 65 or older, the percentage in that category has been largely unchanged at 8 percent.

While the wealth gap has been widening gradually due to delayed marriage and increases in single parenting among young adults, the housing bust and recession have made it significantly worse.

For young adults, the main asset is their home. Their housing wealth dropped 31 percent from 1984, the result of increased debt and falling home values. In contrast, Americans 65 or older were more likely to have bought homes long before the housing boom and thus saw a 57 percent gain in housing wealth even after the bust.

Older Americans are staying in jobs longer, while young adults now face the highest unemployment since World War II. As a result, the median income of older-age households since 1967 has grown at four times the rate of those headed by the under-35 age group.

Social Security benefits account for 55 percent of the annual income for older-age households, unchanged since 1984. The retirement benefits, which are indexed for inflation, have been a consistent source of income even as safety-net benefits for other groups such as low-income students have failed to keep up with rising costs or begun to fray. The congressional supercommittee that is proposing budget cuts has been reviewing whether to trim college aid programs, such as by restricting eligibility or charging students interest on loans while they are still in school.

Sheldon Danziger, a University of Michigan public policy professor who specializes in poverty, noted skyrocketing college tuition costs, which come as many strapped state governments cut support for public universities. Federal spending on Pell Grants to low-income students has risen somewhat, but covers a diminishing share of the actual cost of attending college.

"The elderly have a comprehensive safety net that most adults, especially young adults, lack," Danziger said.

Paul Taylor, director of Pew Social & Demographic Trends and co-author of the analysis, said the report shows that today's young adults are starting out in life in a very tough economic position. "If this pattern continues, it will call into question one of the most basic tenets of the American Dream — the idea that each generation does better than the one that came before," he said.

Other findings:

—Households headed by someone under age 35 had their median net worth reduced by 27 percent in 2009 as a result of unsecured liabilities, mostly a combination of credit card debt and student loans. No other age group had anywhere near that level of unsecured liability acting as a drag on net worth; the next closest was the 35-44 age group, at 10 percent.

—Wealth inequality is increasing within all age groups. Among the younger-age households, those living in debt have grown the fastest while the share of households with net worth of at least $250,000 edged up slightly to 2 percent. Among the older-age households, the share of households worth at least $250,000 rose to 20 percent from 8 percent in 1984; those living in debt were largely unchanged at 8 percent.

Honestly, it's not surprising to me. With the way the economy it is, the younger generations are finding it harder to accumulate the net worth a older person has had (literally) a life time to amass.

[The Minx]

I was kind of surprised that the gap was as large as all that, though. 47 times is quite a large difference.

[Destructionator XV]

I doubt it is about the economy. Three years isn't much of a person's net accumulation.

It's almost certainly college debt horribly depressing young people's money. College cost has skyrocketed in the last couple decades, has has enrollment.

When people are paying over 4x more - after adjusting for inflation - today than the older generation, and they are all going into it, well that's a formula for debt slavery.... meaning negative net worth.

[rhoenix]

I doubt it is about the economy. Three years isn't much of a person's net accumulation.

It's almost certainly college debt horribly depressing young people's money. College cost has skyrocketed in the last couple decades, has has enrollment.

When people are paying over 4x more - after adjusting for inflation - today than the older generation, and they are all going into it, well that's a formula for debt slavery.... meaning negative net worth.

Oh?

While people typically accumulate assets as they age, this wealth gap is now more than double what it was in 2005 and nearly five times the 10-to-1 disparity a quarter-century ago, after adjusting for inflation.

I don't think it's just about college debt.

[Destructionator XV]

I don't recall the actual article link, but here's the graph:




I was mistaken - it's only about 3x after adjusting for inflation. That's still a skyrocket.


The average American today graduates with about $25,000 in debt: http://www.nytimes.com/2011/11/03/educa ... .html?_r=1 and is rising rapidly.


I'm sure mortages and other debt contributes too, but college is certainly a huge contributor.

[rhoenix]

Oh?




I'm really not seeing how you're laying the entire economic woe the US is undergoing at the feet of college tuition.

[Destructionator XV]

I'm not talking about the entire economic woe, I'm talking about the change described in the OP. I'm not seeing how you're placing a 50x change across the board based on age groups on a 4x change on the top 1% based on income. The math just doesn't work.

Of course, a 3x change doesn't explain it all either, but it's at least looking at the right variable.

[Destructionator XV]

Actually, the magnitude of the change isn't really important there, since they are already making a lot more money than everyone else.

But, even so, income is deceptive because net assets is in - out, not just in. Are they accumlating wealth or pissing it away?



But regardless, it's still the wrong variable. The op thing was talking about typical households.

[rhoenix]

The op thing was talking about typical households.

Ok, since you're trying to narrow the scope of the debate, fine. What do you consider a "typical household?"

[Destructionator XV]

The typical U.S. household headed by a person age 65 or older has a net worth 47 times greater than a household headed by someone under 35, according to an analysis of census data released Monday.

[...]
Households headed by someone under age 35 had their median net worth reduced by 27 percent in 2009 as a result of unsecured liabilities, mostly a combination of credit card debt and student loans.

Not my words.

Presumably, this is an average of the nationwide census data.

[rhoenix]

The typical U.S. household headed by a person age 65 or older has a net worth 47 times greater than a household headed by someone under 35, according to an analysis of census data released Monday.

[...]
Households headed by someone under age 35 had their median net worth reduced by 27 percent in 2009 as a result of unsecured liabilities, mostly a combination of credit card debt and student loans.

Not my words.

Presumably, this is an average of the nationwide census data.

Neat, but you dodged my question - I'm not in a debate with the article, I'm in a debate with you. So, what do you consider to be a "typical household" for the case of this debate?

[Destructionator XV]

I don't even know what this debate is about. I've been talking about the OP's young/old accumulated wealth difference.

But, whatever, a typical household here is defined by the average from the gathered stats.

[Comrade Tortoise]

Of course, a 3x change doesn't explain it all either, but it's at least looking at the right variable.

Are you high? This is what your logic looks like:

Variable Y explains N Percent of Variable X
Variable W exlains M percent of Variable X, which is smaller than the percent explained by variable Y

Therefore, Variable W is the superior explanatory variable.

What the fuck are you doing? I know you dropped out of college, but this is Jr. high level math.

While people typically accumulate assets as they age, this wealth gap is now more than double what it was in 2005 and nearly five times the 10-to-1 disparity a quarter-century ago, after adjusting for inflation.

Net Worth is in effect a persons Assets minus their liabilities. So yes, college debt is a component: because irrespective of what an old person might initially have owed, it is paid off by their sixties. The same with mortgage debt, auto-debt, credit card debt etc. In fact, it is highly likely that a person of retirement age now, has almost no actual debt remaining at all. Only assets, like the unfinanced equity on their house, all the now antiqued nick-nacks they have lying around. Valuable baseball cards from the fifties, coin collections, some random object they picked up in Korea. Oh, and they have guaranteed income. Compare that to a thirty five year old, who still has college debt, a mortage, is still paying off a car, has no hideously valuable collectibles etc, oh, and because unemployment is hovering between 9 and 10 percent, does not have a job.

But of COURSE, it is all college debt.

[Destructionator XV]

Are you high? This is what your logic looks like:

That's not what it says at all.

Variable Y explains N Percent of Variable X and is present across J% of one target population, and K% of the other target population

Variable W explains M percent of Variable X, which is smaller than the percent explained by Variable Y, but is only present across L% of the target population, and D% of the other target population. Since L and D are close - the 1% has both young and old individuals - and L is much, much smaller than J (the 1% are, well, the 1%, whereas the majority of Americans hold college debt).

Therefore Y is a larger contributor than W.

Gah that's confusing. But:

3x increase * 1% < 3x increase * 70% (according to the BLS, about 70% of high school graduates go to college)

basically. A change that affects a lot of people can skew averages more than a bigger change that affects a smaller number of people.




Moreover, since W is spread across both target groups, it isn't properly isolated and we really can't say if it's a contributor at all. There's individuals in the top 1% of earners both over 65 and under 35. To say if this contributed to the change in assets, we'd have to isolate this, and see what the split is.


And, of course, like you said, accumulation is income minus expenses time years. You have to integrate the difference between income and expenses over the age to get accumulation. So, gotta look at both sides, not just one.

But of COURSE, it is all college debt.

I didn't say that. I said: "I'm sure mortages [sic] and other debt contributes too, but college is certainly a huge contributor."

College is the first or second biggest individual expense in most people's lives, with only a house being bigger. It's incurred early, and financed by debt - so the cost rises exponentially as time goes on, and they are unlikely to be able to attack it early.

According to the New York Times, the average student graduates with about $25,000 of student loan debt, which I'd note is up from last year, and up from the year before, and most people graduate in their early twenties.

From here:
http://www.nahb.org/generic.aspx?genericContentID=88533 (published January 2008)

Among the nearly 2.4 million households that bought a home for the first time, the average age of the householder was 33 years old (see Table 1). Almost two-thirds of these householders were under age 35

Mortgage debt is a big expense too... but, the average home buyer is much older than the average college student, and most homeowners are married couples, whereas college debt is brought on an individual basis.

The "underwater mortgage" problem we faced with the downturn would affect people right around 35 more than any other group, since they probably bought at the higher prices and haven't paid down the debt yet. This group was not discussed in the OP.

But, the median cost of a house is about $150,000. If we multiply that by the percentage affected in the area, about 40% of people under 35 own a home (see below), and then divide it by two or something, let's use 1.5 from my butt, to account for married people.

150000 * 0.4 = ~$60,000 debt per household on homes with people under 35.... but the home itself is an asset too. In theory, you're putting your money into another asset, so you are losing to interest, not the principle, and since most people don't buy until later in life, there's not as much time for interest to accumulate here.

I'll have to look up numbers for the underwater mortgages, since that actually relates to a net loss.

Now, the college:

25000 * 0.7 * 2 - rounded average household size * 2/3 - number of students who took the debt = ~$23,000 debt per household, excluding interest - this is the number at about 22, whereas most home buys come around age 33. Payments don't really count here, since if they weren't paying down debt, that money could potentially be an asset itself.

Spending the money reduces the net worth, unless it is investing in a financial asset, regardless of when you pay it. The only question is how much interest it gets before you pay it off.

is still paying off a car

An old car isn't much of an asset, since they depreciate so fast. If you own a car, it means you've sunk money into it; a car purchase on it's own is a net loss, financially, regardless of if it is paid off or not.

has no hideously valuable collectibles

Neither do most older people. According to the OP, their biggest asset is their home, which was probably incurred and paid off in the 35-65 area.


But, things have changed since 2005.... which things have? Home prices have gone down, which would hurt the over 65 people, by reducing the worth of their biggest asset, and not have much affect on the under 35 people, since most of them don't own a home. The biggest affect is the underwater people who recently purchased and now got screwed.


Here's another link that puts college at #1 too: http://www.theatlanticwire.com/business ... oke/44664/

It also says most homeowners under 35 have negative equity. Also a link from there says: ""Young adults' net worth is reduced by 27 percent as a result of unsecured liabilities," like credit card and student loan debt, says Taylor. "It's much bigger than is the case for any other age group"

But, how many people under 35 are homeowners?

http://www.danter.com/statistics/homeown.htm

It says about 40% there, which I used above. That's a smaller percentage than affected the college debt... which is still a large number.

[Destructionator XV]

Something else just came to mind, on income and skewing averages.

We can get an idea of the inequality by comparing the median income - what 50% of people get or more - with the average income - the sum of all incomes, divided by the population.


The median for a US household is about $45k. The average I believe is about $60k or $70k, but it might be higher. I can't find an up to date source right now....

But, for as big as the income difference is, since it's held by a small percent of the population, it doesn't skew the average as much as you might think it does. Though, that's still one hell of a skewing!

[AnthonyS]

Nice post!In connection,the yearly Forbes 400 list of the richest Americans found that the net worth of the super-rich has climbed in the last 12 months. The income gap continues to expand, as the middle class recedes. A personal finance can help you pay for things even if you aren’t rich.

[frigidmagi]

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