U.S. Wealth Gap at an All-Time High

The Haves Have More

U.S. Wealth Gap at an All-Time High
January 12, 2015

With the stock market constantly setting new records, why do many Americans still feel pessimistic about the economy? One reason may be that the wealth produced by the stock market is not evenly distributed. A recent analysis of 2013 data by the Pew Research Center indirectly supports this theory.

The Pew Center compiled data from the annual Survey of Consumer Finances conducted by the Federal Reserve, and found that the wealth gap between upper-income families and the next tier down is the highest it has ever been since the Fed started collecting survey data in 1983.

In the Pew study, Fed data is adjusted to account for different family sizes and then split into income tiers, with the middle-income group defined as between twice and two-thirds of the median adjusted income.

After adjustment and categorization, the trend is clear. The median wealth of upper-income families (21% of the nation’s households) reached $639,400 in 2013, almost seven times that of middle-income families (46% of the nation) and a whopping 70 times that of lower-income families (33% of the nation).

In a way, that conclusion should not be a surprise. The results make sense in the context of the definition of wealth and where the current increases in wealth are located.

Wealth is defined as the total of all family assets (homes, bank accounts, investments, etc.) minus all family liabilities (mortgages and other debts). It stands to reason that homes, cars, and traditional bank accounts make up a greater proportion of the assets for middle- and lower-income families, and that stocks and other investments make up a greater share of the assets for wealthier families.

The growth in the stock market over the long term always outpaces other sources of growth such as home equity or simple interest in bank accounts. It is also rare that a large stock market collapse or correction does not also affect the wealth of the lower- and middle-income families. Thus, there is a natural bias toward wealth gap expansion.

Viewing the median household net worth for all three categories over time yields the real story.

The Great Recession knocked all three income categories down between 2007 and 2010, but on a percentage basis, higher- income families lost only 17% in median wealth compared to 39% and 41% losses for middle- and lower-income families respectively. It seems likely that the effect on jobs, the collapse of housing prices, flat wages, and the collective increase of consumer debt squeezed the middle and lower classes disproportionately.

Since then, the median income for the upper-income families has recovered almost a third of the amount lost between 2007 and 2010, or almost $45,000 of a $123,000 loss in value. Middle-income families lost almost $62,000 in median value from 2007 to 2010 and have recovered none of that value yet. Lower-income median net worth has actually continued to decline since that time.

It seems reasonable to think that 2014 wealth values will improve given an accelerating recovery, but because of the roaring stock market, the wealth gap will be wider. More people are finding jobs, but wages are still stagnant and it will take a long time to build wealth in the lower-income classes.

The wealth gap is likely to continue over the next few years, but it may be tempered by two possible events – the eventual rise in interest rates that depresses stocks, or some progressive form of taxation or wealth redistribution. The first is bound to happen before long; the latter may depend on the 2016 election.

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