Trends and Issues in Household Economic Security JASON BROWN U.S. - - PowerPoint PPT Presentation

U.S. DEPARTMENT OF THE TREASURY OFFICE OF ECONOMIC POLICY

Trends and Issues in Household Economic Security

JASON BROWN

 Trends in household economic security  Two key moments of financial decision-making in the life cycle

• Young adulthood
• At retirement

1

Outline of Remarks

2

Macro indicators show considerable recovery from the recession.

2017 Q3 673% 100 200 300 400 500 600 700 800 89:Q1 93:Q1 97:Q1 01:Q1 05:Q1 09:Q1 13:Q1 17:Q1

Household Net Worth as a Percent of Disposable Personal Income

Source: Federal Reserve Board, Financial Accounts of the United States Q3 2017

 Household net worth has reached a record high.

3

Debt burdens have also fallen.

105% 69% 26% 20 40 60 80 100 120 140 89:Q1 93:Q1 97:Q1 01:Q1 05:Q1 09:Q1 13:Q1 17:Q1

Household Debt as a Percent of Disposable Personal Income

Total Debt Mortgage Consumer Credit Debt

Source: Federal Reserve Board, Financial Accounts of the United States Q3 2017

4

The median family has not seen a complete recovery in terms of wealth.

Median Net Worth (thousands of 2016 $) Change

2016 1989-2016 2001-2016

All families

97.3 9.8

• 20.0

Age of head (years) Less than 35

11.0

• 3.6
• 4.9

35–44

59.8

• 45.5
• 45.3

45–54

124.2

• 60.0
• 58.2

55–64

187.3 4.7

• 63.9

65–74

223.4 80.3

• 17.5

75 or more

264.8 129.6 54.4

Source: Federal Reserve Board Survey of Consumer Finances, 1989-2016

5

Household wealth rises with age.

Median Net Worth (thousands of 2016 $) Change

2016 1989-2016 2001-2016

All households

97.3 9.8

• 20.0

Age of head (years) Less than 35

11.0

• 3.6
• 4.9

35–44

59.8

• 45.5
• 45.3

45–54

124.2

• 60.0
• 58.2

55–64

187.3 4.7

• 63.9

65–74

223.4 80.3

• 17.5

75 or more

264.8 129.6 54.4

Source: Federal Reserve Board Survey of Consumer Finances, 1989-2016

6

Recent gains in wealth have accrued to older households.

Median Net Worth (thousands of 2016$) Change (thousands of 2016$)

2016 1989-2016 2001-2016

All households

97.3 9.8

• 20.0

Age of head (years) Less than 35

11.0

• 3.6
• 4.9

35–44

59.8

• 45.5
• 45.3

45–54

124.2

• 60.0
• 58.2

55–64

187.3 4.7

• 63.9

65–74

223.4 80.3

• 17.5

75 or more

264.8 129.6 54.4

Source: Federal Reserve Board Survey of Consumer Finances, 1989-2016

 The burden of financing higher education has increasingly fallen

• n the students themselves.

 Young adults with student debt may delay other major decisions, like home purchase, with implications for wealth building.

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Young adults: Student loan balances have quadrupled in the last 15 years.

0.25 0.5 0.75 1 1.25 1.5 2003 2005 2007 2009 2011 2013 2015 2017

Outstanding student debt

Total outstanding student debt (trillions of 2016 dollars)

Source: Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, Q2 2017.

Q1 2003: $0.3 trillion Q2 2017: $1.3 trillion

 College graduates earn twice as much as high school graduates.

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Higher education is still a good investment, however.

1 1.25 1.5 1.75 2 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Weekly wage ratio, college degree vs. high school diploma

Wage ratio between workers with college degree vs. high school diploma

Source: Figure 10, Autor (2010). Based on weekly wages from the March CPS, adjusted for worker characteristics.

1980: 1.50 2008: 1.97

 Many students attend schools that have systematically low repayment rates.

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While there is a college wage premium, there is considerable variation in outcomes among individuals.

Student Loan Repayment Rate by Institution Institution’s cohort 5-year repayment rate Implied repayment term Share of undergraduate borrowers Below 0% Neg Am 4% 0% to 15% 20+ years 27% 15% to 20% 15-20 years 19% 20% or above <15 years 51%

Notes: Covers undergraduate loans that began repayment in 2009 and observed five years later. Source: Chou, Looney & Watson (2017).

 Key financial decision is not just whether to take on student loan debt, but what education that debt is financing.  Although repayment rates vary by school, it’s not just an issue of selectivity—lots of unselective schools have excellent repayment

• utcomes.

 Completion of degree matters.

• Outcomes of “some college” converging with those of high

school only.  Field of study matters.

• Some majors earn more than others. Among mid-career prime-

age workers, the median earnings for STEM majors are $15,000 higher than for all majors ($76,000 compared to $61,000).

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What education the student loan finances matters.

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Older households: The typical older household has some wealth, but most of it is concentrated in housing.

Median Household Wealth by Marital Status, and Disability Status (65+) Total wealth Non-housing wealth All households $231,311 $87,379

Source: Health and Retirement Study (2000-14) and Treasury calculations

12

Married households with no one disabled are considerably better off than the median elderly household.

Median Household Wealth by Marital Status, and Disability Status (65+) Total wealth Non-housing wealth All households $231,311 $87,379 Married, not disabled $368,928 $163,098

Source: Health and Retirement Study (2000-14) and Treasury calculations

13

Households with a disabled member, however, have much less wealth.

Median Household Wealth by Marital Status, and Disability Status (65+) Total wealth Non-housing wealth All households $231,311 $87,379 Married, not disabled $368,928 $163,098 Married, one or more disabled $157,586 $31,747

Source: Health and Retirement Study (2000-14) and Treasury calculations

 Long-term care costs are high and not broadly covered by traditional health insurance.

14

Single (including widowed) households are also considerably less wealthy.

Median Household Wealth by Marital Status, and Disability Status (65+) Total wealth Non-housing wealth All households $231,311 $87,379 Married, not disabled $368,928 $163,098 Married, one or more disabled $157,586 $31,747 Not married, not disabled $123,752 $31,365

Source: Health and Retirement Study (2000-14) and Treasury calculations

15

The typical single, disabled household has virtually no wealth.

Median Household Wealth by Marital Status, and Disability Status (65+) Total wealth Non-housing wealth All households $231,311 $87,379 Married, not disabled $368,928 $163,098 Married, one or more disabled $157,586 $31,747 Not married, not disabled $123,752 $31,365 Not married, disabled $9,289 $1,255

Source: Health and Retirement Study (2000-14) and Treasury calculations

 Disability and widowhood present major risks to economic security among elderly households, even more than aging itself.

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Older women are especially vulnerable.

6% 21% 6% 9% 29% 12%

0% 20% 40%

Disabled (65+) Overextended (65+) In poverty (65+) Economic security of the 65+ population, by gender Women Men

Source: Health and Retirement Study, Treasury calculations

 Older women are twice as likely to be in poverty than men.  Nearly 30 percent of women are overextended—their spending exceeds what their income and wealth can sustain.  Women are more likely to be disabled.

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The vulnerable older population is mostly women.

 Because women make up a large share of the older population, they also make up a disproportionate share of the vulnerable population.  Along many metrics, women make up over 2/3 of the vulnerable older population.

68% 68% 71% 68% 58% 32% 32% 29% 32% 42% Disabled (65+) Overextended (65+) In poverty (65+) 85+ 65+ Gender distribution of age and economic security indicators among the 65+ Women Men

Source: Health and Retirement Study, Treasury calculations

 A lot of wealth is tied up in housing, but reverse mortgages have not been widely taken up.

• Only about 50,000 reverse mortgages are sold each year.

 The decline in defined benefit plans has not been offset by private annuities.

• The median elderly household receives no income from private

pensions or annuities.  Only about 12 percent of the elderly population has private long- term care insurance.

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Strategic wealth decumulation is key in mitigating risks in retirement, but there is low take-up of relevant products.

 With weak wealth accumulation across most households, financial decision-making becomes even more important.  Households face different issues at different stages of the life cycle.

• Early adulthood decisions have long-term repercussions for

wealth building.

• Decisions made at the time of retirement can shape economic

security for the remainder of one’s life.

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Concluding thoughts