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

Trends and Issues in Household Economic Security JASON BROWN U.S. DEPARTMENT OF THE TREASURY OFFICE OF ECONOMIC POLICY

Outline of Remarks Trends in household economic security  Two key moments of financial decision-making in the life cycle  o Young adulthood o At retirement 1

Macro indicators show considerable recovery from the recession. Household net worth has reached a record high.  Household Net Worth as a Percent of Disposable Personal Income 800 700 600 2017 Q3 500 673% 400 300 200 100 0 89:Q1 93:Q1 97:Q1 01:Q1 05:Q1 09:Q1 13:Q1 17:Q1 Source: Federal Reserve Board, Financial Accounts of the United States Q3 2017 2

Debt burdens have also fallen. Household Debt as a Percent of Disposable Personal Income 140 120 100 Total Debt 105% 80 Mortgage 60 69% 40 Consumer Credit Debt 20 26% 0 89:Q1 93:Q1 97:Q1 01:Q1 05:Q1 09:Q1 13:Q1 17:Q1 Source: Federal Reserve Board, Financial Accounts of the United States Q3 2017 3

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 97.3 9.8 -20.0 All families Age of head (years) 11.0 -3.6 -4.9 Less than 35 59.8 -45.5 -45.3 35 – 44 124.2 -60.0 -58.2 45 – 54 187.3 4.7 -63.9 55 – 64 223.4 80.3 -17.5 65 – 74 264.8 129.6 54.4 75 or more Source: Federal Reserve Board Survey of Consumer Finances, 1989-2016 4

Household wealth rises with age. Median Net Worth (thousands of 2016 $) Change 2016 1989-2016 2001-2016 97.3 9.8 -20.0 All households Age of head (years) 11.0 -3.6 -4.9 Less than 35 59.8 -45.5 -45.3 35 – 44 124.2 -60.0 -58.2 45 – 54 187.3 4.7 -63.9 55 – 64 223.4 80.3 -17.5 65 – 74 264.8 129.6 54.4 75 or more Source: Federal Reserve Board Survey of Consumer Finances, 1989-2016 5

Recent gains in wealth have accrued to older households. Median Net Worth Change (thousands of 2016$) (thousands of 2016$) 2016 1989-2016 2001-2016 97.3 9.8 -20.0 All households Age of head (years) 11.0 -3.6 -4.9 Less than 35 59.8 -45.5 -45.3 35 – 44 124.2 -60.0 -58.2 45 – 54 187.3 4.7 -63.9 55 – 64 223.4 80.3 -17.5 65 – 74 264.8 129.6 54.4 75 or more Source: Federal Reserve Board Survey of Consumer Finances, 1989-2016 6

Young adults: Student loan balances have quadrupled in the last 15 years. The burden of financing higher education has increasingly fallen  on the students themselves. Young adults with student debt may delay other major decisions,  like home purchase, with implications for wealth building. Outstanding student debt Total outstanding student debt (trillions of 2016 dollars) 1.5 1.25 1 Q2 2017: $1.3 trillion 0.75 Q1 2003: $0.3 trillion 0.5 0.25 0 2003 2005 2007 2009 2011 2013 2015 2017 Source: Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, Q2 2017. 7

Higher education is still a good investment, however. College graduates earn twice as much as high school graduates.  Weekly wage ratio, college degree vs. high school diploma Wage ratio between workers with college degree vs. high school diploma 2 1.75 2008: 1.97 1.5 1.25 1980: 1.50 1 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Figure 10, Autor (2010). Based on weekly wages from the March CPS, adjusted for worker characteristics. 8

While there is a college wage premium, there is considerable variation in outcomes among individuals. Many students attend schools that have systematically low  repayment rates. Student Loan Repayment Rate by Institution Institution’s cohort Implied Share of 5-year repayment repayment undergraduate rate term 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). 9

What education the student loan finances matters. 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 outcomes. Completion of degree matters.  o Outcomes of “some college” converging with those of high school only. Field of study matters.  o 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). 10

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 11

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 12

Households with a disabled member, however, have much less wealth. Long-term care costs are high and not broadly covered by  traditional health insurance. 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 13

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 14

The typical single, disabled household has virtually no wealth. Disability and widowhood present major risks to economic security  among elderly households, even more than aging itself. 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 15

Older women are especially vulnerable. Economic security of the 65+ population, by gender Women Men Older women are twice as  12% In poverty (65+) 6% likely to be in poverty than men. Overextended 29% Nearly 30 percent of women  (65+) 21% are overextended — their spending exceeds what their 9% income and wealth can sustain. Disabled (65+) 6% Women are more likely to be  disabled. 0% 20% 40% Source: Health and Retirement Study, Treasury calculations 16

The vulnerable older population is mostly women. Gender distribution of age and economic security indicators among the 65+ Women Men Because women make up a  65+ 58% 42% large share of the older population, they also make up 85+ 68% 32% a disproportionate share of the In poverty (65+) 71% 29% vulnerable population. Overextended 68% 32% (65+) Along many metrics, women  make up over 2/3 of the Disabled (65+) 68% 32% vulnerable older population. Source: Health and Retirement Study, Treasury calculations 17

Strategic wealth decumulation is key in mitigating risks in retirement, but there is low take-up of relevant products. A lot of wealth is tied up in housing, but reverse mortgages have not  been widely taken up. o Only about 50,000 reverse mortgages are sold each year. The decline in defined benefit plans has not been offset by private  annuities. o 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. 18

Concluding thoughts 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.  o Early adulthood decisions have long-term repercussions for wealth building. o Decisions made at the time of retirement can shape economic security for the remainder of one’s life. 19