A Snapshot of Americans' Finances
The nation's apparent dearth of saving was underscored recently with publication by the Federal Reserve Board of its triennial Survey of Consumer Finances (SCF). The survey, which was based on 2004 data from 4,522 families, found that, while soaring housing prices had added to the net worth of American families since 2001, only about half of all families had saved regularly, and the fraction of families with retirement accounts fell. American families may have benefited from bubbly home prices in many parts of the country, but that is a thin reed for longer-term financial security.
The SCF is a rich data set, but the following findings seem to stand out as the most important:
1) Little more than half of all families (56 percent) saved at all in 2004 (other than passively through increased home equity). Not surprisingly, the percentage of families that saved rose with family income (81 percent of families in the highest income decile reported that they had saved, as compared with 34 percent in the two lowest deciles).
2) Even fewer families (41 percent) save as a matter of priority. The remainder view saving as what is "left over" from income (by accident rather than by design) at the end of the year.
3) The net worth -- the difference between families' assets and their liabilities -- of the lowest two income deciles is minuscule, with a median of only $7,500. The median is the halfway mark; half of the families in this group had a lower net worth, and half had a higher net worth. Moreover, most of that net worth is in the form of home equity.
Among all families, median net worth changed little from 2001 to 2004, increasing from $91,700 to $93,100. (All figures are in constant 2004 dollars.) It fell a sharp 24 percent among one demographic group -- families headed by persons with less than a high school diploma. Broken down by age, however, net worth fell only among households headed by persons in the 35-44 age group. In contrast, it rose sharply among those closest to retirement, the 55-64 age group.
4) Retirement and liquidity dominate among the main reasons Americans save. The fraction of families citing retirement as their most important reason for saving increased sharply in the past decade, from one-fourth of families in 1995 to one-third in 2004. This likely reflects the twin trends of an aging society and the reduced availability of employer-funded pensions.
5) With housing prices on the rise, savings in the form of home equity has become an even larger portion of household wealth. By 2004, the median value of home equity in primary residences was seven times the median value of financial assets ($160,000 as compared with $23,000), whereas in 2001 it was only four times as large. The median value of financial assets actually declined during the three-year period, reflecting the slump in the stock market from record highs and accentuating the importance of home-ownership in the typical family's balance sheet.
6) Renters, meanwhile, without the benefit of rising home prices, continue to own little. The median value of financial assets owned by renters, who constitute as much as one-third of all families, was a mere $3,000 in 2004, as compared with $4,000 in 2001. Renters tend to be younger, which helps explain their small financial assets.
7) Few Americans seem to be on track to enjoy any semblance of financial ease in retirement. The nation's retirement system is often said to be a three-legged stool: Social Security, employer-sponsored retirement plans, and private saving. Even with its long-term actuarial imbalance, Social Security may well be the healthiest of the three, relying as it does on the general taxing power of the Federal government and the nation's expressed will to support the elderly. The other two legs are now visibly shaky.
8) Few families own stock outright (21 percent), although many (50 percent) hold equities indirectly in IRAs, 401(k)s and other retirement accounts, and still others (15 percent) own them in the form of non-retirement mutual funds and other pooled assets. Bonds, in contrast, are very tightly held: only 2 percent of families hold them directly. Direct holdings of any significance are almost exclusively among top-income and elderly families. However, many families across the income distribution hold bonds indirectly in mutual funds, IRAs, etc.
9) Americans routinely break the first rule of investing: diversification. Among outright holders of equities, 60 percent had stock in three or fewer companies - among them their own employers. The lesson from the experience of employees of Enron and other failed companies apparently has not yet sunk in.
10) The SCF does not point to overwhelming debt burdens, to judge by the ratio of total debt to total assets (15 percent) and the ratio of scheduled debt payments to income (18 percent). Both ratios increased only slightly from 2001 to 2004.
Not all that much comfort lies there, however, given that two of the factors that helped keep these ratios relatively steady -- sharply rising home values and falling interest rates -- have largely run their course. Now, families face the risk that home equity values will level off or fall as the economy keeps advancing cyclically and interest rates continue to rise. And while families kept their debt-service payments under control from 2001 to 2004 partly by refinancing their mortgages at lower interest rates, some will now face higher payments as the rates on adjustable-rate mortgages increase.
Conclusion
Public polls reflect growing concern on the part of Americans that their saving is inadequate, especially their saving for retirement. They cannot have failed to notice the wide attention given in the past few years to Social Security's long-term actuarial deficit and to Corporate America's shedding of its pension liabilities. Failure to act against the background of these warnings signs could push retirement out for many and even put it out of reach for many others.
Rising home values buffered many families from the impact of lower stock valuations in the 2001-2004 period and have helped offset the lack of other saving. But it is questionable whether most Americans will be able to finance a comfortable retirement by continuing to rely mainly on large increases in the value of their homes.
* * * * *
The SCF is a rich data set, but the following findings seem to stand out as the most important:
1) Little more than half of all families (56 percent) saved at all in 2004 (other than passively through increased home equity). Not surprisingly, the percentage of families that saved rose with family income (81 percent of families in the highest income decile reported that they had saved, as compared with 34 percent in the two lowest deciles).
2) Even fewer families (41 percent) save as a matter of priority. The remainder view saving as what is "left over" from income (by accident rather than by design) at the end of the year.
3) The net worth -- the difference between families' assets and their liabilities -- of the lowest two income deciles is minuscule, with a median of only $7,500. The median is the halfway mark; half of the families in this group had a lower net worth, and half had a higher net worth. Moreover, most of that net worth is in the form of home equity.
Among all families, median net worth changed little from 2001 to 2004, increasing from $91,700 to $93,100. (All figures are in constant 2004 dollars.) It fell a sharp 24 percent among one demographic group -- families headed by persons with less than a high school diploma. Broken down by age, however, net worth fell only among households headed by persons in the 35-44 age group. In contrast, it rose sharply among those closest to retirement, the 55-64 age group.
4) Retirement and liquidity dominate among the main reasons Americans save. The fraction of families citing retirement as their most important reason for saving increased sharply in the past decade, from one-fourth of families in 1995 to one-third in 2004. This likely reflects the twin trends of an aging society and the reduced availability of employer-funded pensions.
5) With housing prices on the rise, savings in the form of home equity has become an even larger portion of household wealth. By 2004, the median value of home equity in primary residences was seven times the median value of financial assets ($160,000 as compared with $23,000), whereas in 2001 it was only four times as large. The median value of financial assets actually declined during the three-year period, reflecting the slump in the stock market from record highs and accentuating the importance of home-ownership in the typical family's balance sheet.
6) Renters, meanwhile, without the benefit of rising home prices, continue to own little. The median value of financial assets owned by renters, who constitute as much as one-third of all families, was a mere $3,000 in 2004, as compared with $4,000 in 2001. Renters tend to be younger, which helps explain their small financial assets.
7) Few Americans seem to be on track to enjoy any semblance of financial ease in retirement. The nation's retirement system is often said to be a three-legged stool: Social Security, employer-sponsored retirement plans, and private saving. Even with its long-term actuarial imbalance, Social Security may well be the healthiest of the three, relying as it does on the general taxing power of the Federal government and the nation's expressed will to support the elderly. The other two legs are now visibly shaky.
8) Few families own stock outright (21 percent), although many (50 percent) hold equities indirectly in IRAs, 401(k)s and other retirement accounts, and still others (15 percent) own them in the form of non-retirement mutual funds and other pooled assets. Bonds, in contrast, are very tightly held: only 2 percent of families hold them directly. Direct holdings of any significance are almost exclusively among top-income and elderly families. However, many families across the income distribution hold bonds indirectly in mutual funds, IRAs, etc.
9) Americans routinely break the first rule of investing: diversification. Among outright holders of equities, 60 percent had stock in three or fewer companies - among them their own employers. The lesson from the experience of employees of Enron and other failed companies apparently has not yet sunk in.
10) The SCF does not point to overwhelming debt burdens, to judge by the ratio of total debt to total assets (15 percent) and the ratio of scheduled debt payments to income (18 percent). Both ratios increased only slightly from 2001 to 2004.
Not all that much comfort lies there, however, given that two of the factors that helped keep these ratios relatively steady -- sharply rising home values and falling interest rates -- have largely run their course. Now, families face the risk that home equity values will level off or fall as the economy keeps advancing cyclically and interest rates continue to rise. And while families kept their debt-service payments under control from 2001 to 2004 partly by refinancing their mortgages at lower interest rates, some will now face higher payments as the rates on adjustable-rate mortgages increase.
Conclusion
Public polls reflect growing concern on the part of Americans that their saving is inadequate, especially their saving for retirement. They cannot have failed to notice the wide attention given in the past few years to Social Security's long-term actuarial deficit and to Corporate America's shedding of its pension liabilities. Failure to act against the background of these warnings signs could push retirement out for many and even put it out of reach for many others.
Rising home values buffered many families from the impact of lower stock valuations in the 2001-2004 period and have helped offset the lack of other saving. But it is questionable whether most Americans will be able to finance a comfortable retirement by continuing to rely mainly on large increases in the value of their homes.
* * * * *
posted by Bob Moser at
8:31 PM
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