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Thursday, November 18, 2010

The Distribution of Household Wealth

Linda Levine
Specialist in Labor Economics

The distribution of household wealth or net worth (i.e., assets minus liabilities) has a number of economic and social ramifications. Household wealth is of particular importance with respect to the welfare of the elderly population, as a person’s labor income typically falls upon retirement from the workforce whereupon they rely in part on returns from accumulated assets (e.g., savings accounts, stocks, and savings bonds) to maintain living standards.

Data regarding the distribution of wealth are limited. There are some data available from estate tax returns, although they reflect only the small proportion of the population that is subject to the tax. A source of more comprehensive data on the distribution of household wealth is the Survey of Consumer Finances (SCF), which the Federal Reserve Board conducts every three years. The latest survey data are for 2007.

The distribution of household wealth in the United States is far from equal, according to SCF data. Two general measures of household wealth are mean and median household net worth. (Median net worth is the point in the overall distribution of household wealth above and below in which one-half of all households lie. It is a better indication of the wealth of the “typical” household than is the mean, which can be greatly affected by the upper end of the distribution.) Over the 1989-2007 period, mean household wealth was consistently and substantially above median household wealth. In 2007, for example, mean household net worth was $556,800 while median household net worth was $120,800. The large gap between the two measures suggests considerable concentration of wealth among households at the upper tail of the distribution.

A more detailed picture of inequality emerges from examining the share of total wealth held by households in selected percentiles of the distribution. If wealth were distributed equally, the proportion of households in the wealth distribution (e.g., the top 1%) would be the same as its proportion of total net worth (in this example, 1%). Instead, in 2007, the wealthiest 1% of households accounted for one-third of total net worth. The next 4% of households (the 95
th to 99th percentile) held more than one-fourth of total net worth. Taken together then, in 2007, the top 5% of wealth owners accounted for about 60% of all wealth accumulated by households.

Wealth has become increasingly concentrated in recent decades, according to SCF data. The share of wealth in the top 10% of the distribution grew from 67% in 1989 to 72% in 2007, with declines occurring in the shares of the lower percentiles. The largest decrease occurred among households in the 50
th to 90th percentile of the distribution, whose share of total net worth fell from 30% in 1989 to 26% in 2007.

The impact of the latest recession on household net worth cannot be gleaned from the 2007 SCF. If household balance sheets taken from the 2007 survey are adjusted for the depreciation of housing and stock prices during the 2007-2009 recession, studies estimate that mean and median net worth fell substantially—much more so than during the two preceding recessions. More definitive information on changes that occurred during the latest recession in the overall value and distribution of assets, debt, and net worth await the release of data from follow-up interviews of households that participated in the 2007 SCF.

Date of Report: November 10, 2010
Number of Pages: 14
Order Number: RL33433
Price: $29.95

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