Income Class and the Accumulation of Net Worth in the United States

The purpose of this study was to investigate the differential rates of accumulating net worth among low- and high-income households. To achieve this objective, the authors, using a sample drawn from the 1998 Survey of Consumer Finances, investigated the degree of elasticity of household net worth (or wealth) to household income among five income quintiles of households. The major finding was that among the lowest quintile, the elasticity was less than zero, meaning that as income increased, net worth declined. The elasticity increased as the quintile moved from the first to the fifth quintile. On the basis of the regression results, the authors concluded that income is a powerful determinant of the accumulation of net worth. The higher the income quintile, the greater the rate of accumulation of net worth. Implications for policy are discussed. KEY WORDS: elasticity; income class; low-income households; net worth ********** It is increasingly recognized that along with income, net worth (or wealth) is an important indicator of economic well-being. Observing the growing inequality in the distribution of net worth, Burtless (1999) warned that the growing net worth disparity in the United States may decrease the sense of social cohesion, creating a segmented society. Increasing inequality in net worth adversely affects the social and psychological conditions of U.S. households (Lynch et al., 1998). With these concerns as a backdrop, the major objective of our study was to compare the rate of accumulation of net worth among different income quintiles of households. To achieve this objective, we investigated the degree of elasticity of household net worth to household income among five income quintiles of households. The paragraphs that follow provide the background of the study and the rationale for identifying relevant variables that are treated as control variables in the study. BACKGROUND Economists say that there is no general theory of the accumulation of net worth (Diaz-Gimenez, Quadrini, & Rios-Rull, 1997). Thus, researchers in this field have dealt with certain hypotheses and concepts to guide their research. Broadly categorized, their concerns are the life-cycle hypothesis, structural variables--demographic and educational, individual psychological disposition regarding saving and investing, the necessity to consume, and others. These concepts are not mutually exclusive. The life-cycle hypothesis states that rational individuals accumulate net worth so that when they become old, they can ensure a continuous flow of income by dissaving what they accumulated while they were young (Land, 1996). In particular, it states that after a worker enters the labor force, his or her earnings and net worth rise and reach a maximum at a certain point and decline thereafter, at which time the accumulated net worth begins to be dissaved. This hypothesis implies that the size of net worth depends on which point in the life cycle a person has achieved (Tin, 1998). Aizcorbe and colleagues (2003) reported that the growth in net worth peaks between ages 55 and 64, and Wolff (1992) showed that the accumulation of net worth peaks at age 69 and then declines at age 70 and older. Because this hypothesis implies a nonlinear relationship between age and the accumulation of net worth, researchers normally include age and age-squared as part of regression models. Structural factors include employment status, education, and marital status, as well as age. Employment provides an opportunity to accumulate net worth through employer-provided pension plans and, therefore, a better chance of generating savings out of ongoing income. Governmental data have shown that the ratio of the net worth of working compared with nonworking people is about 3:1 (U.S. Census Bureau, 2001a). Diaz-Gimenez and colleagues (1997) indicated that education has a positive effect on economic performance in terms of efficient consumption, saving, and investment. …