Retirement

Wealth Gains Across Income Groups Show A Strong And Equitable Economic Recovery

The Federal Reserve recently released new household data in two related data sources that tell an encouraging story about household wealth and its distribution. Household wealth has substantially increased during the pandemic – from December 2019 to December 2023. All income groups have seen similar rates of change in their wealth. Those gains reflect broad improvements in housing and financial wealth. This is a far cry from the Great Recession of 2007 to 2009 when wealth for the bottom 60% of households was still below its pre-recession levels four years after the recession started.

Wealth – the difference between what people own and what they owe – provides a financial cushion in an emergency and allows families to invest in their future or look forward to a more secure retirement. It is highly susceptible to declines for lower-income households during a recession since those households typically experience higher levels of unemployment and drops in wages and thus need to rely more heavily on their savings.

This was not the case during the pandemic-induced recession. Household wealth has outpaced after-tax income over the four years since the pandemic started. By December 2023, average household wealth equaled 7.6 times after-tax income, up from 7.1 times in December 2019. In contrast, the ratio of wealth to after-tax income dropped from 6.6 in December 2007, just before the Great Recession started, to 5.6 in December 2011. In the aggregate, wealth changes are quite different this time around.

These wealth gains are also much more equally distributed than during the Great Recession. Average household wealth for people in the second quintile and third quintile, for instance, increased by about 20% from December 2019 to December 2023 (see figure below). Average wealth grew by 12.3% for households in the bottom quintile, at a similar rate as the 11.5% increase for households in the top quintile. Average household wealth grew by double-digit rates in most income groups and faster among the bottom 60% of households than among those with higher incomes.

This contrasts sharply with the experience of the last recession. Back then, household wealth for the bottom 60% of households fell, while it increased for the top 40%. In fact, the lower the income was, the larger the wealth losses were (see figure above). The heavy fiscal investments during the pandemic paid off in more financial security across the board.

These wealth gains were also widely spread across different types of savings. All household groups saw substantial gains in home equity and financial assets in general, such as stocks and bonds in retirement account balances in particular (see figure below). Households at the bottom saw a 19.3% gain in home equity from December 2019 to December 2023. Their value of retirement account balances increased by 40.3% at the bottom of the income scale, much faster than for any other income group (see figure below). All households gained from the run up in house and stock prices during the pandemic.

Importantly, the average gains in home equity for households towards the bottom of the income scale went along with increasing homeownership. This was not the case for higher-income households. Census data show that the homeownership rate for households with incomes below the median – the income that splits the income distribution exactly in half – went up by 1.6 percentage points. In comparison, the homeownership rate for households with incomes above the median went down by 0.4 percentage points. The increase in household wealth at the bottom reflects real gains in long-term financial security.

It is theoretically possible that the gains in home equity among lower-income households reflect transfers of wealth from higher-income households. This could happen if parents help their children pay for a new house. If this were the case, the data should show larger home equity gains among white households than among Black or Latino households. After all, white households have substantially larger amounts of wealth for intergenerational wealth transfers. By the same token, gains in home equity should be larger among college-educated households than among those without a college degree. The same data, though, show that home equity gains were larger for Black (12.9%) and Latino (8.4%) households than for white households (7.1%). And, average home equity increases were similar or larger for people without a college degree – 16.7% for those without a high school degree, 20.2% for those with a high school degree, and 15.5% for households with some college — than for those with a college degree (16.2%). It is difficult to square these changes with an argument of intergenerational wealth transfers. Rather, lower-income and middle-income households saw substantial wage growth, often outpacing that of higher-income earners, which helped to buy a new house, particularly in the early years before interest rates went up.

Debt is the other side of the ledger. Obviously, as homeownership increased among lower-income households, so did mortgages. The average amount of mortgages spread across all households in the bottom fifth of the income distribution went up by 16.7%. At the same time, consumer credit – credit cards, car loans and student loan debt to name the most important ones – fell especially sharply among lower-income households. Average consumer debt dropped by 10.4% for households in the bottom fifth of the income distribution. In comparison, it declined by 10.0% for households in the second quintile, by 11.6% in the middle fifth, and by 3.9% in the fourth quintile. It increased by 20.4% among households in the top fifth of the income distribution. Since more households owe consumer credit than owe mortgages at the bottom of the income scale, the drop in consumer credit offset most of the increase in mortgages. The sum of mortgages and consumer credit grew by only 2.6% for low-income households. In the second quintile, the sum of mortgages and consumer debt declined by 4.6% over the four years from December 2019 to December 2023. Households at the bottom of the income scale swapped out costly and risky debt for more secure debt that helps to build wealth through homeownership.

The recovery from the pandemic induced recession was fast and equitable. This does not mean that many households are not struggling. They are. But, many households saw meaningful improvements to their short-term financial security and longer-term economic mobility. Those improvements were widespread by income, unlike the experience of the last recession, when economic security and opportunities became more concentrated at the top. These equitable gains would not have been possible without large and continued investments in the economy by the federal government.

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