Household Finances - March/April 2000

Household Finances

Median household sees net worth rise
"Net worth" refers to the difference between assets and liabilities: what a family owns, minus what it owes. If all U.S. households were ranked according to their net worth, the "median household" would be right in the middle. By looking at changes in the median, it’s possible to get a sense of how a "typical" household is faring. In that light, the second half of the 1990s brought some impressive gains – particularly in comparison with the first part of the decade. Between 1989 and 1995, the net worth of the median household was basically stagnant, rising just 2 percent over the entire period. Between 1995 and 1998, in contrast, it jumped 18 percent. By 1998, the median U.S. household had a net worth of $71,600. All of these figures are drawn from the Federal Reserve’s "Survey of Consumer Finances" conducted every three years.

Winners and losers -- wage earners lag behind
A closer look at the Fed’s latest figures reveals winners and losers. Big increases in the net worth of retirees and the self-employed served to pull up the median, while other population groups saw much smaller gains – and, in some cases, outright declines. The median net worth of households headed by a wage or salary earner, for example, increased less than one percent between 1995 and 1998. (Wage and salary earners account for a 59 percent majority of all U.S. households.) Median net worth decreased for low-income households (those with incomes of $25,000 and under); for households headed by someone under age 35; for households headed by someone who did not attend college; and for African-American and Latino households.

Stock ownership spreads, but still less than 50%
The percentage of households owning stock — either directly or through a mutual fund, retirement account, or other managed asset — continues to grow. As recently as 1989, fewer than one in three U.S. households had any stock holdings. By 1998, that had grown to almost one in two. The jump between the 1995 and 1998 surveys was particularly striking. In the space of three years, stock ownership increased by 8.4 percentage points, from 40.4 percent of U.S. households to 48.8 percent.

Riskier household portfolios
With the spread of stock ownership has come a broader shift toward riskier portfolios. Over the 1989-1998 period, the percentage of household financial assets kept in bank accounts, certificates of deposit, and savings bonds fell, as households put more of their savings in higher-return – but riskier – investments. Directly-held stocks, which accounted for 15 percent of household financial assets in 1989, grew to 22.7 percent of the total in 1998. The growth in mutual fund investments was even more striking: from a negligible 5.3 percent of total financial assets in 1989, to 12.5 percent in 1998. With U.S. households taking on more risk in their own portfolios, it’s troubling that employers are trying to shift still more risk onto their employees, through the substitution of defined contribution plans for traditional defined benefit pensions.

Debt burden grows heavier
Nearly three quarters of U.S. households have debt of some kind. The median amount of debt owed by those households was $33,300 in 1998, up from $23,400 just three years earlier. Even though interest rates on many types of loans fell between 1995 and 1998, debt payments rose as a percentage of household income. The 1998 survey also shows that a significant number of households (particularly at low and middle incomes) are struggling with truly burdensome debt payments. For 12.7 percent of households with debt, loan payments add up to more than 40 percent of income. Not surprisingly, a growing number of households are not keeping up with their payments: the percentage with one or more payments at least 60 days past due reached 8.1 percent in 1998.

Source: "Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances," Federal Reserve Bulletin (January 2000)