People are angry. Voters demanding change have helped make Donald Trump the presumptive Republican nominee for president and fueled Bernie Sanders’ ferocious challenge to Democrat Hillary Clinton.
But what are they angry about? Ask and you’ll hear about Washington gridlock, Wall Street greed, trade, stagnant pay, immigration. To me one huge factor is obvious when you look at the chart below. It shows how much wealth has been lost — at least among those who weren’t rich to begin with.
Median net worth, 1998 vs. 2013
|Source: Federal Reserve Survey of Consumer Finances; figures in 2013 dollars|
*Bottom 20% of incomes; **second lowest 20% of incomes; ***middle 20% of incomes. Median means the halfway point, with half of the households in this group having more and half having less. Net worth is what you own minus what you owe.
It’s not news that incomes have stagnated. (A new Pew Research Center analysis finds the middle class as defined by income shrinking in 203 out of 229 metro areas.) It’s well known that the Great Recession took a big bite out of people’s home equity and retirement accounts.
What’s gotten a lot less attention is the huge slide in wealth that started well before the housing market cratered in 2007.
“Net worth dropped long before the recession, if you exclude housing wealth,” says sociologist Fabian Pfeffer, research assistant professor at the University of Michigan’s Institute for Social Research, who adds that wealth for many Americans began to decline in the mid-1980s. “The housing bubble was hiding the loss for the typical American household.”
The end of upward mobility
Pfeffer dug into the numbers in a research paper for the Russell Sage Foundation in 2014, along with economists Sheldon Danziger and Robert Schoeni. They used a different nationally representative survey, the Panel Study of Income Dynamics, to show the erosion in wealth.
Their work didn’t get a whole lot of publicity, at least not until recently, when it was mentioned in an Atlantic magazine cover article, “The Secret Shame of Middle-Class Americans,” about relatively affluent families living paycheck to paycheck. The drop-offs in wealth cited in the story were so dramatic I thought surely someone had done the math wrong.
So I dug through a different database, the Federal Reserve’s 2013 Survey of Consumer Finances, which Pfeffer calls the “gold standard” of data on American wealth. Every way I sliced the data, the trends came up the same.
When researchers look into household finances, they typically focus on income and the plight of the shrinking, beleaguered middle class. But a look at the wealth numbers shows it’s the working class that really has taken it in the teeth.
- Median net worth for those in the second lowest quintile of incomes — which in 2013 meant incomes from $23,300 to $40,499 — dropped by more than half.
- The net worth of the bottom 20% fell by more than a quarter.
- For the middle class, with 2013 incomes of $40,500 to $63,100, the drop was 19%.
Overall, median net worth is down about 21%. The only reason the median didn’t fall more was because net worth for the top 10%, those with 2013 incomes over $154,600, rose nearly 75%.
This is not a few families getting in over their heads. This is a tsunami threatening to drown the American dream.
Rising wealth in previous generations turned renters into homeowners, high school graduates into college students, and workers into the comfortably retired. Once you had a little wealth, you could parlay it into more by investing in education, a home, a business, the market. You could boost the next generation, too, by helping to pay for college, assisting with a down payment, maybe leaving a little legacy when you died.
Falling wealth means less money to do any of these things. It’s the difference between a world where you can expect your future to be brighter and one in which each generation can expect less and less.
Less wealth and more debt
What I couldn’t unearth from the data was why this was happening. Turns out, that’s because nobody has.
“That is the $1 million question,” says Pfeffer, who has spent his career studying the links among education, wealth and social mobility. Researchers have “ideas and theories,” but no settled science or consensus, he says.
What’s clear is that incomes peaked in 1999, and have yet to recover. Furthermore, every age group and most income groups lost substantial ground in the Great Recession, and some continue to lose it. Those in their 50s, for example, lost more than 3% of their incomes each year between 2008 and 2013, according to research by economist Robert Shapiro for the Center for Effective Public Management at the Brookings Institution. Incomes for younger workers may have fallen less, but their pay has either continued to fall or grown by only minuscule amounts since then.
Pfeffer wonders if stagnant incomes have led to people “consuming out of their assets” — in other words, spending what they’ve accumulated to make ends meet. For households with kids, higher costs for education and child care may play a role.
Only part of the answer is on the asset side. Homeownership rates were slightly lower in 2013 among the bottom 60% than in 1998, as was stock ownership, according to the Fed’s Survey of Consumer Finances. Affluent families are not only more likely to own both but to own a lot of both, and so enjoy a larger share of any recovery.
What has increased significantly is debt. The survey shows that:
- Three-quarters of U.S. families owed money in 1998 and 2013, but the median amount climbed 30%, to $60,400.
- Two-thirds of working-class households had debt in both years, while the median amount jumped 48%, to $21,300.
- Among lower-class households, debt jumped 68% to $10,600. The percentage of families with debt also rose, from 47.3% in 1998 to 52.1% in 2013.
- Increases were less dramatic for the middle class. About 80% had debt in either year, but the amount rose 9%, to $39,900.
The culprit isn’t credit card debt, by the way. The percentage of families owing on their cards shrank, sometimes dramatically, in every income bracket. What rose is mortgage and installment loan debt. When you don’t have savings to pay for homes and cars and college, you take on more debt.
Yes, the deck is stacked
This is the point in the column where I usually kick in with the “takeaway” — the 5 Things You Can Do Right Now to Make Everything Better. Except with a problem this big, a few tips on how to cope don’t just feel useless. They’re kind of insulting.
But my editor pushed back, pointing out that no matter how rigged the system, we still have to live in it. When no one has your back, you have to get tougher and smarter.
That means managing your finances in a defensive crouch. Save like your future depends on it, because it does. Patrol your statements for the fees and charges that pick your pocket. Never believe a lender that tells you what you can afford — decide for yourself.
Getting ahead isn’t as easy as it was, and falling behind is easier.
But remember: It’s not just you. So maybe it’s time to stop listening to pundits, politicians and personal finance gurus who insist that it is.