Changes in family finances from 1989 to 1992: evidence from the Survey of Consumer Finances

Using newly available data from the 1992 Survey of Consumer Finances along with previously available data from the 1989 survey, this article provides detailed evidence of the way family income and net worth changed over the three-year period. Although the processing of the 1992 data is not yet complete, the preliminary findings indicate some noteworthy changes in the income and net worth of families. First, in a development that paralleled declines in interest rates over the period, families tended to shift their asset portfolios away from traditional deposits and toward mutual funds. Second, an important increase occurred in ownership of taxdeferred retirement accounts as well as in the median size of such accounts. Third, despite a decline in real family income over the period, the median ratio of debt payments to family income remained steady, largely because declining interest rates tended to lower payments. Finally, income and net worth for nonwhite and Hispanic families grew substantially relative to the comparatively low levels at which they started the period. To a large extent, the findings from the survey reflect recent macroeconomic events and other, longer-term trends. In terms of macroeconomic changes, the period from 1989 to 1992 spanned a recession and an evolving expansion. In 1989, the U.S. economy was at the end of a long expansion, with a civilian unemployment rate of 5.4 percent; by 1992, the economy had started its recovery from the 1990–91 recession, but the unemployment rate stood at 7.5 percent.1 Partially reflecting the effects of recession, the proportion of families headed by persons in blue-collar jobs declined as the proportion headed by persons who were not working rose. Concurrently, interest rates on three-month certificates of deposit fell from 7.7 percent to 3.1 percent while rates on long-term, fixed-rate mortgages declined less sharply, from 9.8 percent to 8.0 percent. At the same time, the Standard and Poor’s 500 index of stock prices rose at an annualized rate of 7.1 percent, and real home prices leveled off or, in some areas, even declined. On average, consumer prices rose 4.2 percent per year over this period. Several longer-term trends also affected family finances. The number and types of mutual funds available to consumers continued to grow as the cost of information processing declined. Continued easing of restrictions on interstate banking, the decline of the savings and loan industry, and the increase in the local presence of national mortgage lenders changed the types of institutions that families faced when obtaining loans. As the tax advantages of individual retirement accounts weakened, employers—responding to a variety of changes in legislation governing pensions— increasingly offered tax-deferred savings plans as a way for workers to accumulate savings for retirement. A long-running demographic trend is the aging of the large post–World War II cohort. In the three-year period covered by this article, the proportion of families headed by persons between 45 and 54 years of age, a group largely composed of this ‘‘baby boom’’ generation, rose from 14.4 percent to 16.2 percent. A smaller increase also occurred in the fraction of families headed by persons aged 65 and more.