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

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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.