U.S. Wealth Hits a Record, Typical Savings Plan Is Still ‘Buy a House’

Photographer: Chris Rank/ Bloomberg

The net worth cul-de-sac: Buy a house and pay down the mortgage is the typical American’s investing plan.

U.S. household net worth climbed by $3 trillion to surpass $80 trillion in the latest data from the Federal Reserve. It’s a number so dumbfoundingly big that it almost invites Americans to celebrate just what a rich country we are. It shouldn’t.

The full balance sheet is a goldmine for data geeks. It’s worth drawing attention to the two biggest components of the $80 trillion: household real estate, with a value of $19.4 trillion, and $19.6 trillion of pension entitlements. That second part isn’t exactly what it sounds like to most folks, so let’s break it down further.

The $19.6 trillion pension total includes $4.9 trillion invested in 401(k) plans (which most Americans don’t think of as “pension entitlements”) plus $3.1 trillion in private pensions and $8.5 trillion in government pension entitlements. IRAs hold another $5.7 trillion worth of securities. (For those counting, the rest of that $19.4 trillion is in life insurance.)

So, basically of $80.7 trillion in household wealth, only $10.6 trillion, or about 13 percent is in 401(k)s and IRAs, the key instruments of middle class wealth accumulation. Decades of effort to get Americans to save, and incentives from both government and companies  haven’t worked very well. The $4.9 trillion in accumulated savings in 401(k)s are much less than the pensions of government employees, who make up just 14 percent of U.S. workers.

Add up IRA and 401(k) plans, and the total is still a scant 25 percent more than government worker pensions alone (and some of those IRAs belong to government employees and retirees). Despite constant exhortations to save, the vast majority of middle-class and even upper middle-class workers don’t. Or at least they don’t in the instruments that they’ve been urged to use.

What do most American private-sector workers actually do? Consider the other big component of wealth, that $19.4 trillion in real estate. Except there’s an asterisk here: subtract $9.4 trillion in mortgages, and we’re left with $10 trillion in home equity. That’s about the same as the total in IRAs and 401(k), though that doesn’t quite tell the whole story, because the accumulation of home equity is heavily weighted toward folks in middle-age or older.

The very nice chart below, from the Census Bureau’s economists, gives a very good idea of the median family’s overall financial pictures. It dates to 2011, but the overall situation hasn’t changed much.

That chart nicely reflects the gap between what policy makers wish would happen with middle-class savings, and what really does happen. In the ideal world, the upper middle-class would save lots of money, put it in retirement accounts filled mainly with index funds, and see their savings multiply as the overall economy grows.

In real life, (1) private-sector workers save fairly little, and (2) the main way of accumulating wealth is to buy a house. That house is a highly leveraged and potentially very profitable investment in the early years of your mortgage and as the mortgage is paid down becomes less leveraged and less profitable. This is especially if you believe that, in the long run, the value of housing in most places can’t outstrip salaries and inflation.

So the bottom line is that Americans are not accumulating wealth at anything like the rate we would hope, and not accumulating it in a way that lets them share in a stock market boom. And from a very appealing $80 trillion number we get to a fairly disheartening conclusion.

Correction: The Federal Reserve’s total for pension entitlements is $19.6 trillion. An earlier version of this story at one point misstated it as $19.4 trillion, which the total for household real estate holdings.

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