The Transformation of the American Pension System: Was It Beneficial for Workers?

2 Recent Trends in Household Wealth, 1983-2009: Robust Growth Followed by Collapse

11 2 Recent Trends in Household Wealth, 1983–2009 Robust Growth Followed by Collapse It is useful to begin the empirical part of the book with a presentation of wealth trends based on the standard definition of wealth. This will serve as a backdrop for the rest of the book. In particular, we will see how our basic findings on wealth trends change when we include retirement wealth in the definition of household wealth. Moreover, we will be able to see some of the reasons for the plunge in wealth during the “great recession” of 2007–2009. The 1990s witnessed some remarkable events: the stock market boomed, stock ownership spread, and real wages, after stagnating for many years, finally grew. The prices of stocks listed on Standard & Poor’s (S&P) 500 index surged 171 percent between 1989 and 2001, and by 2001 over half of U.S. households owned stock either directly or indirectly. According to Bureau of Labor Statistics (BLS) figures, real mean hourly earnings gained 8.3 percent between 1995 and 2001 (Council of Economic Advisers 2009a).1 However, 2001 saw a recession, albeit a short one. Moreover, the stock market, which had peaked in 2000, dropped steeply from 2000 to 2003 but recovered in 2004, so that between 2001 and 2004 the S&P 500 was down by “only” 12 percent in real terms (Council of Economic Advisers 2009b).2 Real wages rose very slowly from 2001 to 2004: the BLS real mean hourly earnings rose by only 1.5 percent, while median household income dropped in real terms by 1.5 percent (Council of Economic Advisers 2009c). On the other hand, housing prices rose steeply. The median sales price of existing one-family homes rose by 18 percent in real terms nationwide (U.S. Census Bureau 2009). The other big story was household debt, particularly that of the middle class, which skyrocketed during these years, as we shall see below. Wolff.indb 11 Wolff.indb 11 11/21/2011 9:16:51 AM 11/21/2011 9:16:51 AM 12 Wolff From 2004 to 2007, the stock market rebounded. The S&P 500 rose 19 percent in real terms. Over the period 2001–2007, the S&P 500 was up 24 percent (6 percent in real terms). Real wages remained stagnant, as the BLS real mean hourly earnings rose by only 1.0 percent. Median household income in real terms showed some growth over this period, rising by 3.2 percent. From 2001 to 2007 it gained 1.6 percent. From 2004 to 2007, housing prices slowed, as the median sales price of existing one-family nationwide advanced only 1.7 percent over these years in real terms. Over the years 2001 to 2007, real housing prices gained 19 percent. Updating previous studies (Wolff 1994, 1996, 1998, 2001, 2002a, 2007d), I find that median net worth, the wealth of the average household , demonstrated robust growth over the years 1983–2007. In fact, the growth rate of median wealth accelerated from the 1980s to the 1990s and into the 2001–2007 period. However, the gains of that period were based largely on rising home prices financed by increasing mortgage debt. This growth came to an abrupt end in 2007 with the collapse in home prices, and median wealth plummeted from 2007 through 2009. Household wealth inequality increased sharply between 1983 and 1989. However, in a surprising development, this increase was followed by a period of almost no change in household wealth inequality from 1989 to 2007. This trend during those years was unexpected because the two factors normally associated with wealth inequality, income inequality and the ratio of stock prices to home prices, both showed a marked rise over the same years. Between 1983 and 2007, and particularly from 1989 to 2001, there was a striking shift in the portfolio composition of household wealth: out of liquid assets like savings accounts and money market funds and into DC pension accounts. There was also a noticeable expansion of stock ownership from 1989 to 2001, followed by a mild contraction between 2001 and 2007. Furthermore, DC pension accounts became more heavily invested in equities, making them vulnerable to the stock market downturn in 2007–2009. Moreover, despite the buoyant economy over the 1980s and 1990s, overall indebtedness continued to rise among American families and then skyrocketed in the early and mid 2000s. Among the middle class, the debt-income ratio reached its highest level in 24 years. The high Wolff.indb 12 Wolff.indb 12 11/21/2011 9...