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Friday, May 27, 2011

The Distribution of Household Wealth

Linda Levine
Specialist in Labor Economics

The distribution of wealth or net worth across households may have been an underlying consideration in congressional deliberations on various policy issues ranging from taxation to social welfare. Household wealth is of particular importance to the well-being of the elderly as labor income typically falls upon retirement and some retirees are able to use accumulated assets (e.g., certificates of deposit and mutual funds) to maintain their standard of living. Congress has enacted tax incentives to help people amass savings to be drawn once they have retired. For a variety of reasons, however, some elderly among other households find themselves without sufficient wealth to maintain their customary, or some socially acceptable, living standard in the face of expected and unexpected events. Congress has developed several publicly funded programs that supplement the income and other assets of these households (e.g., retirement, disability, and health benefits under Social Security).

The distribution of wealth across U.S. households is far from equal, according to data from the Survey of Consumer Finances (SCF) in which the Federal Reserve Board (Fed) sponsors every three years. Two summary measures 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 onehalf 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.) Mean household wealth has been consistently and substantially above the median. 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 substantial concentration of wealth at the high end 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 share of households in the wealth distribution (e.g., the top 1%) would be the same as its share 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 also has become increasingly concentrated in recent decades, according to the SCF. The share of wealth in the top 10% of the distribution grew from 67% in 1989 to 72% in 2007, with declines occurring among the remaining 90% of wealth-owning households. Households in the 50
th to 90th percentile had the largest decrease: their share of total wealth fell from 30% to 26%.

To assess the impact of the financial crisis and consequent recession on household wealth, the Fed reinterviewed respondents to the 2007 SCF shortly after the recession ended. According to results released in March 2011, the net worth of most households decreased during the recession. Expressed in 2009 dollars, mean household wealth fell from $595,000 in 2007 to $481,000 in 2009, and median wealth fell from $125,000 to $96,000. Declines in home and stock prices seemingly contributed to the drop in net worth. As homes are a more widely held asset than stocks, the bursting of the housing bubble appears to have played the bigger part in reducing household wealth between 2007 and 2009. Although stock prices have rebounded since then, continuing problems in the real estate market suggest that it will be a drag on the wealth of homeowners for some time to come.

Date of Report: May 16, 2011
Number of Pages: 13
Order Number: RL33433
Price: $29.95

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