Thursday, August 11, 2005

Democratization of Wealth Watch

by Tom Bozzo

While visiting today, I noticed a "plain talk on investing" item entitled "Will baby boomers cause a market meltdown?" A Vanguard analyst is quoted as expecting "some modest selling pressure" in the stock markets from baby boom retirees. The article proceeds to list several mitigating factors. Among them? Rich retirees don't need to sell their equities; they can live off the dividends. Plus, rich retirees hold a lot of equities.

According to this paper by Fed economist Arthur Kennickell (cited in the Vanguard item), the richest 10% of households — minimum net worth in 2001, $745,500 — held 88% of individual stocks according 2001 Survey of Consumer Finances data, still the most recent available.

Individual stock holdings are not particularly common among the non-rich, but other asset categories don't make the distribution of financial wealth look much more equal. The top 10% held 79% of mutual fund balances, 96% of bonds, 60% of funds in retirement accounts; add in a few other financial asset categories and the bottom line is they held 72% of all financial assets. (*)

Things are not completely rosy as the remainder of the above-median-wealth households were sitting on just under $2.1 trillion in their retirement accounts, plus another trillion or so in stocks and nonretirement mutual fund accounts, much of which will need to be eaten at some point.

Not a big factor are the poorest half — maximum net worth in 2001, $87,500 — who sit on an aggregate of $512 billion in financial assets, which is not quite one-twelfth of the holdings of the top one percent. That half of the population should be hoping that the Republicans don't screw up Social Security too badly.


(*) If you want to try this at home for a few other quantiles, you can get close enough for rock 'n' roll to Kennickell's figures using data in this table (Microsoft Excel spreadsheet).
I don't think it's quite fair to lump in all the younger generations with the soon-to-be retirees in your analysis. The 55-64 age group is the richest of any of the groups (and the richest age group in the history of the world). I imagine looking at their statistics alone as they reach retirement would yield a rosier picture than when lumping them with Generations X and Y, because we haven't had the time to increase our net worth, and besides, we've been smoking pot and playing video games.
You're right that there are life-cycle effects that are relevant, though it's still the case that the very rich (independent of age) are much richer than the average older household.

Table 6 from the linked spreadsheet shows that for households headed by 55-64-year-olds, 57.1% had some direct or indirect stock holdings, with a median holding for the households with some stockholdings of $81,200. By advanced math, $81,200 is roughly the 71st percentile of equity holdings for that group. And 42.9% have zero!

If you broaden things to all financial assets, then ~95% have something, and the median holding for that group (52.5th percentile) was $56,600. You want to be staring down retirement with that? I didn't think so.

As it happens, I've never touched pot in my life, but no comment on how much sooner I could have finished my D if Master of Orion and Sid Meier's Civilization never existed.
Let's not pretend that the older generation wasn't smoking pot and equivalent-of-video-games. (Age 55 just means "born ca. 1950"--ending high school around the Summer of Love and shagging if they didn't get fragged, etc. I won't try to claim that my experience with Pac-Man and Pong is anywhere near so extensive as Tom's with Master of His Domain. But the counterbalance for the older part of that range was legal LSD-25 and the like.)

One of the FRB's (don't have the paper with me) did a study of wealth changes 1992-2001. The short version is that, under Clinton, the rich got richer, while the poor benefitted some. But the spread increased even then. (As Richard Stalla notes, the 1993 tax "increase" benefitted the investor class significantly--more savings in the capital gains cut than cost in the 3.6% income premium.)
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