Another Bright Spot! Middle Class Wealth: It’s Not as Bad as It Looks

In the Brookings post, “Middle Class Wealth: It’s Not as Bad as It Looks,” Opinion, July 5, 2102, it debunks the gloomy view that the middle class are in the worst shape in decades.  It says, “The Census Bureau released its latest data on wealth, updating earlier figures from 2005 to 2010. The numbers confirm findings from a Federal Reserve Board survey showing unprecedented declines in the net worth of the typical American household. Viewed in context, however, the wealth levels of middle-class Americans are in better shape than these dramatic figures would suggest, though they have not improved markedly over several decades.”

Explaining what is really happening, the post states, “In some sense the recent drop in wealth is a mirage, because it reflects the reversal of wealth increases that themselves were illusory. For the vast majority of families, “wealth” essentially means, “home equity”. And the relatively high wealth levels of the mid-2000s reflected the inflation of the housing bubble. The bursting of the bubble exposed the wealth gains as having been unreal and produced the sizable declines in net worth revealed in the government data. How illusory were the earlier wealth gains? In 1998, home prices were right in line with the cost of rental housing by historical standards. By early 2006, they had increased 70 to 90 percent more than rents had. Correspondingly, median non-financial assets increased 41 percent from 1998 to 2007, while median financial assets rose just 1 percent. Only now are home prices approaching the historical norm again relative to rents.”

An interesting point is the measurement of wealth levels does not include “public and private commitments that most Americans can count on to meet their needs in old age.” If  “the present value of Social Security benefits were included in the definition of wealth, median net worth for adults under age 65 in 2010 would be at least four times higher than indicated by the standard definitions of net worth used by the Census Bureau and the Fed. And this adjustment would still exclude the value that future Medicare benefits will have for most retirees, as well as the value of traditional pensions and retiree health benefits provided by employers.”

A final point made is that as people age, their wealth tends to increase.  And while we have not seen “sizable improvements in the wealth levels of the middle class…over the long run, things are not getting worse.”  And sometimes, things not getting worse is very good news.