CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Warning: Wealth Comparisons by Age Group Through Time Are Bogus!

Warning: Wealth Comparisons by Age Group Through Time Are Bogus!

Print
Wednesday, 27 March 2013 05:10

The NYT commits the common sin of making such comparisons in an otherwise useful piece on the economic plight of millennials. It tells us:

"The average net worth of someone 29 to 37 has fallen 21 percent since 1983; the average net worth of someone 56 to 64 has more than doubled."

Of course we should be looking at medians, not averages, since Bill Gates' immense wealth doesn't help the rest of his age cohort. When we look at medians, the rise in wealth for older workers is much smaller, trailing the growth of the economy over this period. However even this number (10 percent for workers between the ages of 55 and 64) hugely overstates the growth in wealth. In 1984 the typical older worker would have had a defined benefit pension, the value of which is not included in these data. A relatively small share of older workers today would have a defined benefit pension. Therefore, this comparison hugely overstates the gains in wealth for older workers over the last quarter century.

Median wealth for those approaching retirement, which includes the value of equity in their home, is roughly $170,000. This means that the median older household can use every penny they have to completely pay off their mortgage. Then they would have nothing left to support themselves in retirement except their Social Security. Everyone should understand this is the positive vision of wealth presented in this piece.

Young people never had much wealth (in 1983, median wealth for young people was around $10,000), so the drop in wealth is not a serious cause for concern. The loss of wealth shown in the Pew study is roughly equivalent to a reduction of $10 in future monthly income or a cut in pay of 7 cents an hour for a full-time worker or 3.5 cents an hour for a two worker household. Their labor market prospects, which are bleak, are the real issue for young people. It is unfortunate that major research centers like the Urban Institute and Pew have issued studies that imply otherwise.

Comments (13)Add Comment
...
written by LSTB, March 27, 2013 8:26
Median wealth for those approaching retirement, which includes the value of equity in their home, is roughly $170,000. This means that the median older household can use every penny they have to completely pay off their mortgage. Then they would have nothing left to support themselves in retirement except their Social Security.


According to the link, "median wealth" means that if the median household sold its home and satisfied the mortgage(s) with the proceeds of the sale it would have $170,000 in cash plus its future anticipated government benefits. It does not mean that they have a $170,000 mortgage and $170,000 in the bank.

I'm not a financial planner, but the question is whether that $170,000 is enough. This is not "nothing," but it's almost certainly less than what they had in 2007.
Mortgage arithmetic
written by Dean, March 27, 2013 8:44
LSTB,

I'm not sure of the issue here. The median household has enough wealth to fully pay off their mortgage. That means that they have a home free and clear and no other assets --hence my use of the word "nothing." Alternatively, they could sell their home and have $170,000 in cash. They could use this money to live on, but would then have to pay rent.

Is there something complicated about this?
...
written by LSTB, March 27, 2013 8:55
Dean,

You used the phrase "they would have nothing left to support themselves in retirement except their Social Security." $170,000 may not be a defined benefit plan, but it is not nothing, and it's not like many Americans don't pay rent out of Social Security.
Confusion on mortgage
written by Dean, March 27, 2013 9:21
LSTB,

I assumed that readers understood that if they paid off their mortgage they would own their home.
...
written by LSTB, March 27, 2013 9:45
Dean,

I hope your readers don't also assume that people who own their homes free and clear can't tap their equity, e.g. by a reverse mortgage. It's not necessarily a good idea, but it's not like the median household would have $170,000 in inaccessible wealth.
Perhaps these research centers have a bias to support their wealthy patrons.
written by John Wright, March 27, 2013 10:04
There is an article mentioning American's low savings rate on Marketwatch of March 26,2013.

see http://articles.marketwatch.co...scott-hoyt

The article is rather vague in many ways, and one could read it as stating the Employee Benefit Research Institute found that 57% of Americans planning to retire report less than 25K in household savings and investments.

The EBRI.org report can be found at http://www.ebri.org/pdf/briefs...4.RCS1.pdf

There are some interesting statistics in this report:

1. Only 52% of retirees report they could definitely come up with $2000 if an unexpected need arose in the next month.

2. 47% of workers aged 45 and older report savings and investments of less than $25K.

3. 88% of all workers report their expected retirement ages has increased.

4. 70% of retirees report Social Security is a major source of income.

5. The 57% figure comes from this:
"Sixty-six percent of workers report they and/or their spouse have saved for retirement, although a sizable
percentage of workers report they have virtually no savings or investments. Among RCS worker respondents
providing this type of information, 28 percent say they have less than $1,000. In total, 57 percent report that
the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000."

These numbers are consistent with low median wealth in middle age and retired households.

If there is evidence of "regulatory capture" in the government regulatory agencies, perhaps Pew and other foundations are susceptible to "patron capture" when they produce reports.

In "patron capture" the foundations produce reports to suggest that things are good for the median American if one group (elderly, in this case) will simply share with their younger descendants. This is a comfortable finding for their wealthy patrons.

But the numbers indicate that, at the median level, there is little to give.

The Simpson-Bowles entitlement "reform" will be a difficult pill for many elderly to swallow.







let's see ...
written by David, March 27, 2013 2:12
LTSB: one medical incident will eat up that $170000 equity in one bad day; or require assisted living. There goes the $170,000 in a year or less, and then it's state homes after that. If it's not nothing, then it's next to nothing and you making the point that is not nothing ... well, your compassion is not nothing either, but it might as well be.
...
written by Amy, March 27, 2013 3:00
One question, and I don't know the answer, would defined benefit plans that used to be common be considered income and not wealth, since the employee didn't own the asset, but had a claim on the income? Then today's 401(k) type arrangements would be wealth because the employee actually owns the account. Is this right and how would it factor into this discussion?
Wealth comparisons by median in the U.S. are also mostly worthless!
written by Perplexed, March 27, 2013 4:03
All this skewness just creates so many problems! If we only had a normal distribution all of this stuff would make so much more sense! What exactly is the meaning of "median income" in a country with a Gini coefficient of over .87 How should we describe in words what this is telling us about the Country's wealth distribution? When the range of those below the median is from 0 to $57,000 (ok, slightly less than 0 for those 22% with actual negative net worth), and range of the median to the top from $57,000 to over $65 billion? Does this statistic add to our understanding of the wealth distribution in the Country or simply provide cover for the concentration and obscure our understanding? Shouldn't we be using mode to better describe what the reality is for most Americans (less than $5,000 based on Edward Wolff's research)? Or should we be using Gini and trying to get people to understand what it means and how it better describes what is going on? Or is it possible that clarity and understanding are not what we're really after?

If we don't change our campaign finance laws to public only financing of political campaigns with the dollars distributed by the voters, we don't have a democracy where the voters hold the power. So what is it we really have instead and how much damage do we have to endure before we recognize it, expose it, and change it?
Life of $170K NW
written by James, March 27, 2013 6:45
with no mortgage and no home, LTSB said folks could tap into that for reverse mortgage to support one's golden years.

Assuming principal perservation is #1 so growth rate is only 3% and a 65 yr old could live up to 85, monthly withdrawal could be as high as $940!

What happened if that elderly lady could surpass 85? hmmm...you have SS to rely on.

Meanwhile, with avg. SS monthly about $1,600 (just a wild guess) and the $940 monthly annuity, you have to pay rent, medical expense, foods, etc. And you better not live any where close to the coastal states like NY, WA, or CA.

http://www.bankrate.com/calculators/investing/annuity-calculator.aspx
median income measure and value of future income streams
written by John Wright, March 27, 2013 9:14
Re:
"All this skewness just creates so many problems! If we only had a normal distribution all of this stuff would make so much more sense! What exactly is the meaning of "median income" in a country with a Gini coefficient of over .87 How should we describe in words what this is telling us about the Country's wealth distribution?"

The median wealth number is probably a good single number to use as it is the number at which 50% of the population has more and 50% less.

Assuming the wealth distribution is somewhat normal around the median and not a bi-modal distribution (people only at the extremes) the median does give a representative value for middle class people as one might expect the middle class to be distributed around the median value.

Re:Amy, March 27, 2013 3:00
"One question, and I don't know the answer, would defined benefit plans that used to be common be considered income and not wealth, since the employee didn't own the asset, but had a claim on the income? Then today's 401(k) type arrangements would be wealth because the employee actually owns the account. Is this right and how would it factor into this discussion?"

I believe these could be factored into the wealth number by calculating the Net Present Value. An income stream can be discounted to reflect what it would cost to buy an annuity to provide that stream, this is the Net Present Value.

For example, assume someone expects to have a monthly Social Security check of $1230 and they will live 20 years with this check arriving.

Future value = 0 (20 years from now the person dies)
Number of payments 12 * 20 = 240
Discount rate (interest rate during that 20 year period) = 5%
Payment = 1230/month

The Net Present Value of this income stream is $186,376 per my HP 12C calculator.

N=240
FV = 0
I = 5/12
PMT = 1230

Defined benefit plans could be handled the same way.

And Social Security is MORE valuable because it has traditionally been inflation adjusted.

Note, by decreasing the future SS benefits as politicians (of both stripes) have proposed, the calculated SS NPV drops. This is similar in effect to the Estate tax that some politicians rail against, except it is levied against the living, not the dead.

This calculation indicates the wealth of many Americans' is in their Social Security income stream.

I am an engineer, not an economist, and appreciate any corrections to my writings.

Lies, damn lies, and statistice
written by Perplexed, March 28, 2013 12:00
@ John Wright

My point, (which I obviously didn't make very clearly), is precisely that using the "median" conveys to readers that "its about it in middle." Dean points out that its a better measure of "central tendency" than the average because the distribution is so skewed and I agree with that. I suggest mode is even better because its the "most common value" and may more closely reflect the reality of the situation for more people than either the mean or the median because of the nature of the underlying distribution. My assumption is that most casual readers interpret these numbers from what they know about a "normal distribution" with a large grouping around the middle (2/3 within one std. dev. from the mean) and smaller portions as you get further from the mean. My point is that the wealth distribution in the country looks nothing like that, and using these statistics masks what's going on.

We have a wealth Gini coefficient of .87 in this country, (.92 when you exclude single family home wealth). This is very typical for a banana republic. A good way to interpret this is that 87% of the area under the curve between equal division of wealth, and one person owning everything, is gone. The scale is from 0 (equal distribution of wealth) to 1.0 (one single person owning everything). We are .13 (or .08 if you don't count single family homes) away from a single person (actually family) owing everything in a country of 320+ million people. It seems quite odd to me that, in a country with $67 trillion dollars of wealth, we are discussing whether a retired person who is "about in the middle for people of that age," would be able to get by in their retirement with a "nest egg" of $170,000, and never questioning why, in the richest country in the world, the people in the middle have so little wealth (and this at age where their wealth usually is at its peak). Look again at the ranges in my original post. We are arguing over the change in the register because the vault has been emptied.

My point is that using these "central tendency" statistics with such a skewed distribution obscures this reality; a reality that we should really be talking about. You said you're an engineer. Would you use the median or mean strength value to design a structural member or would you be more concerned about the "lower tail of the distribution"? Means and medians have their purpose, describing the wealth distributions in this country just doesn't happen to be one of them.
...
written by PeonInChief, March 28, 2013 10:59
Someone, somewhere did a computation of the value of a defined-benefit pension, and determined that the value of a $3K a month pension was just under $600K. With SS and many defined-benefit pensions, though, it's a bit more complicated, as both often are paid through the life of the worker and the worker's spouse.

Of course, I can't find the link. Sorry.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.

busy
 

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives