A Life-Course Approach to Measuring Household Wealth

This paper illustrates how to measure per-period wealth and compares per-period wealth to more traditional measures, such as current net worth (current assets minus current liabilities). Per-period wealth differs from net worth in two major ways. First, per-period wealth adds future entitlements that are contingent upon survival, such as the present value of defined benefit pension and Social Security entitlements. Second, the wealth measure used here is measured as a flow instead of a stock. It is the amount of income that the present value of assets, liabilities, and contingent claims would earn each year in order to draw this present value down to exactly zero at the end of an individual's life. Three alternative strategies for calculating per-period wealth are illustrated in detail. Using the 1992 Survey of Consumer Finances, the U.S. distribution of per-period wealth is estimated using all three models and is contrasted against the distribution of conventional net worth. Furthermore, the sensitivity of t he estimates with respect to the parameters of the model is discussed. The results suggest that the distribution of per-period wealth is less evenly distributed than the distribution of net worth. Access to wealth is perhaps the most important aspect of consumer well-being. The amount of capital--human and nonhuman--that an individual or household has accumulated is important not only regarding future consumption possibilities but also economic security. Typically, research examining the distribution of wealth has used net worth or simply assets minus liabilities (e.g., Weicher 1996). The analysis here will differ from previous research in two major ways. First, the present value of assets to be earned in the future, particularly those from a defined benefit pension or Social Security, will be included in the estimate of wealth. Second, the expected per-period stream of income that a household could afford itself per year until termination, given length of life, interest rates, and rates of inflation, will be calculated. The result will be a conceptualization of wealth, called here per-period wealth. Because a large proportion of households are headed by two individuals who share their resources, step s are taken to ensure that calculating per-period wealth for married couples is consistent with that of single households. Because per-period wealth ignores future earned income, it has often been used to measure the economic status of the elderly, a subsection of the population for whom future earnings would be relatively little (see Moon 1977; Rendall and Speare 1993). However, it is at least as good an estimate of the population's well-being. For example, per-period wealth can be used as a benchmark measure of how well one could manage if one could not find work, needed to stay home to care for family, or became disabled. It has also been used to illustrate how prepared a population is for retirement (Mitchell and Moore 1998). This suggests that a wealth conceptualization such as this is important in the financial process, at least as valuable as the concept of current net worth. The 1992 Survey of Consumer Finances is used to estimate per-period wealth for all households in the sample. These estimations have several goals. First, the sensitivity of the results to the assumptions made in the model is discussed. Specifically, we will alter assumptions regarding the interest rate, the rate of inflation, future Social Security policy, the cost of living differences between one and two people, and life expectancy. Second, the coefficient of variation is used to examine differences in the distribution of per-period wealth versus the distribution of net worth. The coefficient of variation will be used to compare these two distributions as a way of standardizing the units of measurement because net worth is measuring a stock of resources, where per-period wealth measures a flow of resources over the life course. …