The Inclusive Economy
Declining Household Wealth and What We Can Do About It
By Ethan Geiling on 06/26/2012 @ 05:00 PM
New data from the Federal Reserve’s triennial Survey of Consumer Finances (SCF) show that household income and wealth significantly dropped from 2007 to 2010. The Survey of Consumer Finances is one of the most robust national data sets on the household balance sheet.
Median household income (adjusted for inflation) fell 7.7% between 2007 and 2010. We at CFED believe that financial security is not just about what you earn – it’s also about what you own. Household net worth – which includes assets such as a home, business, car, and money in a bank account – decreased even more drastically than income.
Median household net worth fell 38.8%, from $126,400 to $77,300 over just three years. Not surprisingly, most of this decline was driven by the collapse in housing prices. The decline was especially pronounced in populations where a home was their main asset, like families headed by someone 35 to 44 years old. For this group, net worth fell 54.4%, from $92,400 to $42,100.
These data confirm much of what we found in the 2012 Assets & Opportunity Scorecard. And in particular, low-income households and households of color have been disproportionately impacted over the past few years. It’s clear that the recession and its aftermath have left unprecedented numbers of families barely able to make ends meet.
The Federal Reserve also found that the proportion of families that saved any money dropped from 56.4% in 2007 to 52.0% in 2010.
In addition to gathering information on if a family saves, the Federal Reserve asks families why they save. From 2001 to 2007, the top reason for saving money was retirement. However, in 2010, for the first time, families identified liquidity or “saving for a rainy day or emergency” as the top motivation for saving. This makes sense given the economic context. In a weak economy with high unemployment and shrinking services, vulnerable families are prioritizing short-term precautionary savings over longer-term savings goals like homeownership or retirement.
How Policy Supports Wealth Building
The federal government helps many families build wealth and save for long-term goals like homeownership and retirement. For example, consider historical policies such as the Homestead Act, GI Bills and creation of the 30-year mortgage, as well as current policies such as home mortgage interest deductions and tax-preferred retirement savings. All of these policies are examples of government-supported wealth building.
Unfortunately, such policies have been uneven and inconsistent. And in many cases, even as government subsidizes asset building for middle- and upper-income households, it restricts such opportunities for low-income households. The reason for this disparity is simple: The primary way government supports wealth-building is through special deductions and deferrals in the tax code. So, if you don’t earn enough to have a tax liability, you can’t benefit from these subsidies. CFED’s report - Upside Down: America’s $400 Billion Federal Asset-Building Budget – investigates exactly how much the federal government spends on wealth building and who benefits from these incentives (hint: it’s not the families that need the help).
The Survey of Consumer Finances data show that families continue to struggle. It also underscores the need for us to reform the “upside down” system of wealth building incentives in this country.