Wealth Gap 'Enormous,' Savings Paltry
Last year brought a barrage of bad news for aging baby-boomers. Studies warned that Social Security and the pension system--two legs of their retirement stool--are very shaky. What then of the third leg--private wealth and savings?
Consider the findings of a recent RAND analysis of the most richly detailed survey data on household wealth available to date:
Wealth inequality in America is simply enormous, several times greater than the growing income differentials that have triggered so much recent discussion and dismay. Most households of those who are middle-aged and elderly have very modest holdings at best; large segments of the over-50 population have no net worth. And in what amounts to a corollary, the only families that are saving substantial amounts are those that are already well off.
With the pension system in decline[1] and Social Security's current promises impossible to keep as the population ages, the message of this study for baby boomer and successive generations is unmistakable. Author James P. Smith, a leading labor economist, observes, "Loud alarm bells are ringing for the future."
Two new national surveys, conducted by the University of Michigan and funded by the National Institute on Aging, underpin Smith's analysis.[2] One sampled 7,600 households with at least one member between ages 51 and 61. The other sampled 6,000 households with at least one spouse 70 or over. The high-quality data, which will be supplemented at two-year intervals, enable researchers to delineate the distribution of wealth within these pre- and post-retirement age groups and also to provide explanations for the pattern. The result is a host of new and important insights.
Disparities in conventional wealth are very large among white households. (Smith uses a broad definition that includes financial assets such as savings accounts, stocks, bonds and IRA/KEOGH accounts, plus home equity and business holdings.) The top 5 percent of white families over 70 have wealth of $655,000, seven times the $90,000 held by the median white household. White households in the bottom decile have less than $800.
Race and ethnic disparities are huge. Those in typical older black and Hispanic households have less than $20,000 in wealth. More than a fourth of those in older black households and a third of older Hispanics have no assets at all.
Differences in financial wealth are especially dramatic. Among white households in their pre-retirement years (51-61), for example, the top 5 percent have saved $300,000, the typical family has $17,300, and the bottom fifth has $800 or less. The typical black and Hispanic household has under $500 in financial assets. Four out of ten have nothing.
What accounts for this bleak picture? Unequal financial inheritances? That's a popular and logically plausible notion that Smith's study proves wrong, he asserts. When inheritance flows are eliminated from the wealth distribution, 90 percent of current inequalities remain.
Differences in income, however, do affect the distribution of wealth for the not surprising reason that the poor have less income to devote to savings. Unequal incomes explain many of those yawning racial differences in wealth. Still, they don't tell us why the savings rate of lower income households trails that of the upper tier by so much. What can?
Marriage is one answer, Smith notes. Poor families are more likely to divorce and less quick to remarry. That's a handicap in the wealth sweepstakes if only for the obvious reason that a married household includes the assets of both spouses. There is more to it than that, however. Smith's research provides evidence that marriage strongly encourages savings behavior. The implication, he adds, is that the decline in the institution of marriage has contributed to the secular fall in the nation's aggregate savings rate.
Ill health, often a problem for the poor, is another factor that may be critical to wealth distribution. Households in excellent health have more than four times the wealth of those in poor health. Moreover, while declines in health status steadily reduce wealth, improvements substantially augment it. The health of both spouses is equally important in this equation. Median wealth in households where both spouses are in poor health is about $25,000, compared with a median wealth of over $200,000 when both enjoy excellent health.
Smith adds one last explanation for the low savings rate among the poor--badly designed public policies. Aid programs that bar participation if one's assets exceed an extremely low limit offer one type of disincentive. (For example, a family with more than $1,000 in assets can't get help from Aid to Families with Dependent Children, the most important welfare program.)
Smith argues that Social Security provides another. In promising to replace a high proportion of the income received by the poor during their working years, it discourages efforts to save for retirement. "One reason that the poor don't save is that we give them every reason not to," he declares.
As this suggests, current and anticipated Social Security benefits are a form of wealth in themselves. Pension payments are another. In fact, the widely used concept of conventional household wealth actually "hides half of the iceberg" because the combination of Social Security and pension wealth is as important as conventional wealth for most households.
To tell the entire story, Smith offers a concept he calls total household wealth that combines conventional, Social Security and pension resources. The result is to put household wealth distribution and its sources in a fresh perspective.
From this new vantage point, households appear better off. For white households with a member of 60 or older, household wealth is almost half a million dollars instead of the roughly quarter of a million for conventional household wealth alone. But it is the political and substantive power of Social Security that is most strikingly illuminated. For minority households, the benefit represents the largest part of their wealth. For the poorest white and black households, it is basically the only wealth they have. It is the largest single form of wealth even for the typical white household, edging out conventional household wealth by a hair. The dilemma is evident.
What can be done to rescue the tottering retirement structure? To make the public support system sustainable, Smith urges that Social Security be revised to provide only "a minimum decent standard of living" in old age. It should no longer be viewed as the prime source of retirement income replacement across all income levels. The thrust of Medicare reform, he allows, should be "to provide insurance for the real health care risks and not full subsidies for everyone." To encourage greater private savings, he proposes a consumption tax or a mandatory provident-type public pension fund. Assets tests on other public programs should be relaxed or eliminated so savings will not be discouraged.
"Given the daunting dimensions of our future problems, our guiding principle must be to be bold," he summarizes. "No tinkering at the margin will do."
[2]These are the Health and Retirement Survey (HRS), which focuses on transitions into retirement and the Asset and Health Dynamics of Oldest-Old (AHEAD), which assesses the well-being of those already likely retired.
James P. Smith, RAND/DB-145-RC, 1995, 37 pp., ISBN 0-8330-2289-X, $6.00.