Wealth: A Real Measure of Well-Being

Recently, I discussed new IRS data showing that the share of total income going to the richest 400 individuals has increased. However, income is an imprecise measure of well-being. That is better measured by wealth. A new study by the Federal Reserve sheds important light on the distribution of wealth in the U.S.

Every three years, the Federal Reserve does a survey of wealth distribution, known as the Survey of Consumer Finances (SCF), which is considered the most accurate data we have on this issue. One reason is that the Fed makes a special effort to get a statistically significant sample of the wealthy. Such people guard their privacy and it is notoriously difficult to get accurate data on their assets and liabilities.

Forbes Magazine makes a heroic effort each year to calculate the wealth of the 400 richest Americans using public sources. But such data are at best educated guesses, given the complexity of family wealth, which may be spread around various members in ways hard to determine, as well as questions about what constitutes ownership when significant assets may be tied up in trust funds.

Interestingly, the Fed survey deliberately excludes those on the Forbes 400 list. But the result is that a significant percentage of wealth is left out of the data. In 2001, the aggregate wealth of the Forbes 400 equaled 2.3 percent of total personal wealth in the U.S. The new Fed study tries to remedy this omission by using the published Forbes data to augment the Fed’s own survey data.

First, the Fed looked at the Forbes data, which has been published annually since 1982. Between 1989 and 2001, 630 different families occupied the list for one or more years. Over that period, their average wealth rose from $921 million to $2.2 billion. However, the group has seen a significant decline in the last few years as the stock market crashed. Average net worth peaked in 2000 at $3.1 billion and has fallen by 30 percent since then.

By contrast, those lower down the wealth distribution have done much better, because most of their net worth is tied up in housing rather than stocks. But even those that are not homeowners have done relatively well. Between 1989 and 2001, the percentage of all families with negative wealth (i.e., those with more debts than assets) fell from 7.3 percent to 6.9 percent. And those with a net worth less than $1,000 fell from 8 percent of the population to just 5.4 percent. In fact, the total number of people with less than $5,000 in assets in 1989 fell sharply by 2001, from 23 of all families to 18.2 percent.

At this point, it is important to remember that these people did not disappear from the ranks of the poor because they became worse off. The data include those with negative wealth, so if they became worse off they would still be in the database. Therefore, the decline in the number of those with low wealth must be because they became wealthier, rising up into the ranks of those with higher wealth.

In short, every wealth class became better off. As the Fed study puts it, “Over the period from 1989 to 2001, the SCF data show that the distribution of wealth shifted up broadly in real terms-another way of saying that in absolute terms there were fewer poor families and more families who were wealthier.”

The percentage of all families with a net worth greater than $500,000 has been especially rapid, rising from 10.1 percent of all families in 1989 to 14.8 percent in 2001. The Fed attributes much of this growth to the aging of the Baby Boom generation, which moved into its peak earning years over this period. And with retirement facing them in the near future, members of this generation are also saving and investing more heavily, a task made easier by the fact that for many their children are now out of school and on their own.

Looking at all families headed by someone aged 44 to 55, only 11.8 percent have less than $5,000 saved, while 20.3 percent have at least $500,000. Almost 70 percent of Baby Boomers have of net worth of at least $50,000.

The Fed study also looked particularly at African Americans and found that they too shared in the general upward trend of wealth and asset ownership. In fact, their wealth grew faster than that of whites between 1989 and 2001, with the ratio of white wealth to black wealth falling from 18.5 to 6.4. Forty percent of African Americans now have middle class levels of wealth-between $25,000 and $250,000-very close to the 43 percent of whites with such wealth.

It seems that a rising tide really does lift all boats.


Distribution of Families by Net Worth, 1989-2001 (percent)

Thousands of 2001 Dollars
Less than 0 to 5
5 to 25
25 to 100
100 to 250
Over 500

Source: Federal Reserve