Financial Income: Not Important for Most Households

Over the past several decades, America’s financial sector has boomed. Financial assets have appreciated rapidly  The range financial investment options available to consumers has multiplied. One might assume that this has led to a boom in financial income for households. It has not. Today, households receive less money from financial investments than they did thirty years ago.  The typical US family earns much less in financial income than twenty years ago.

The Financial Boom, and Rising Incentives to Invest

The myRA is a government program intended to promote financial investment among lower-income households
The myRA is a government program intended to promote financial investment among lower-income households

America’s financial sector is much larger than it was forty years ago.  There is much more money flowing through financial markets.  Financial markets now make up a greater proportion of overall economic activity.  Financial enterprises now employ far more people.  The rising stature of financial markets is widely known as financialization.

There is a lot of debate about whether or not financialization benefits the average American household.  Some argue that expanding financial markets have created new opportunities to borrow or invest, which theoretically leads to more businesses and jobs.  Moreover, it is though to have provided US households with great opportunities to accumulate wealth.  From the 1980s until the 2008 crisis, financial markets were very prosperous, and those who were invested in it reaped the benefits.  Those with the resources and foresight to invest in financial markets enjoyed excellent returns.

In the midst of this financial boom, many government programs sought to encourage households to invest more in financial markets.  Programs like the IRA, 529s, 401k’s, or the more recent myRA give people financial incentives to invest.  To those who see financial investment as a boon to households, such programs help people help themselves.

What is interesting is that, although financial markets have grown considerably, financial returns have been high, and government incentives to invest have grown, the typical family makes much less off of financial investments than 25 years ago.

Financial Income is Widely Falling

The table below compares the size and composition of financial earnings among US households in 1992 versus 2013. Data are from the Federal Reserve Board’s Survey of Consumer Finances.1 It describes the percentage of US households receiving various forms of income, and the median take of each investment type.  The median take is the median value of this income among all households receiving any financial income of the sort in question.  Note that these figures are in constant dollars.

Year 1992 2013
Median Income (all households) $43,314 $46,669
% Receiving Financial Income 44% 23%
Median Total Financial Take $928 $958
% Receiving Interest Income 40% 17%
Median Interest Income Take $564 $250
% Receiving Dividend Income 17% 13%
Median Dividend Income Take $538 $1,220
% Receiving Capital Gains 6% 6%
Median Capital Gain Income Take $2,700 $5,000
% Receiving Tax Exempt Bond Income 5% 2%
Median Tax Exempt Bond Income Take $2,140 $3,800

The table suggest that fewer people receive financial income, but those who have been able to invest in stocks are taking in more money.

Fewer Households Receive Any Kind of Financial Income

The table shows that the proportion of households receiving any kind of income has fallen considerably. In 1993, 44% of US households received any kind of financial income. By 2013, about half as many households received anything. Even though far fewer households receive any kind of income, the median take hasn’t moved. In effect, the typical person who sits in the top 25% of society in terms of financial income now receives as much from their investments than someone in the top 50% person twenty years ago.

The fall in household incomes from finance is mainly the result of low interest rates. Most of the households receiving financial income did so through the interest that they received on deposit accounts or certificates of deposit. Today, those accounts yield next to nothing in the present investment environment. In other words, less than half as many people receive interest income today as twenty years ago, and those who are fortunate enough to keep getting this kind of income are receiving far less than in the past.

Similarly, the prevalence of holdings in other financial income categories has fallen, though less dramatically. For those who continue to earn income from these sources, the typical take has risen. Capital gains were buoyed by spectacular gains in the stock market by 2013. Dividends have also risen. For tax-exempt bonds (like munis), the typical take has risen, but it is probably a byproduct of fewer, bigger investors being left in those markets.

This fall is one source of consternation among wealthier older people, who were relying on their accumulated wealth to yield low-risk income through these kinds of investments.

The Median Take from Stock Market Investments 

Those who have managed to maintain an investment in stock markets have seen their takes rise.  The typical take on capital gains has roughly doubled in the past quarter-century.  Dividends’ take has more than doubled.

What is interesting, however, is that the franchise of these investments has not expanded much.  Despite the massive development in private financial markets, and multiple government programs designed to encourage financial investment, the proportion of households receiving financial income has more or less stayed the same, if it has not fallen.  Moreover, it is not as if this exponential growth has created a massive stream of income for those who are invested in financial markets.  Households who are invested in financial markets are generally wealthier, such that these typical takes are not huge.  An elite 6% of US society is receiving any kind of dividend, but that dividend amounts to about $100 a month – far less than what Social Security delivers.

Investment Markets are Not Critical to the Vast Majority of US Households

While we may be impressed by the massive growth in financial markets, the historical returns that have accrued to shareholders, and the government’s policy of aggressively encouraging financial investment, financial income accrues to a very small proportion of US households.  Moreover, most of those who receive financial income are not receiving much, relative to other common income sources like labor or government payments.  The franchise of financial investment is simply not expanding.  Financial income is much more critical to very wealthy households, and its role in shaping income is marginal to zero for the vast majority of Americans.

 

  1. With help from Anthony Damico’s excellent resources, see http://www.asdfree.com

Am I Rich? Musing about Income and Wealth Differences across Economic Class Lines

How much money does it take to be part of the upper class? The lower class? These types of questions are troublesome. There are undeniably wealthy people who think that they are middle class, and some patently poor people who self-identify as part of the middle class. Drawing economic class lines is complicated.

Still, it is interesting to draw hypothetical lines. The exercise gives us some indication of what different classes’ personal finances might look like, and where someone seems likely to lie on the country’s economic hierarchy.

According to a 2012 survey by the Pew Research Center,1 about 32% of US society self-identifies with the lower or lower-middle class. Another 49% identify with the middle class proper. A further 15% identify with the upper-middle class, and 2% with the upper-class. Without data on these respondents’ personal finances, we cannot create a profile of how households’ finances differ across (self-identified) economic classes.

Drawing Class Lines with Data

Perhaps another solution is to ask how household finances differ across classes if people were to correctly identify their own economic class. For example, if the 2% of respondents were correct that they were at or above the 98th percentile of income or wealth, then how much would they earn or possess? We can answer this question using data from the Survey of Consumer Finances2. The table gives the implied income and net worth ranges:

Class Income Range Net Worth Range
Lower Class
(min to 7th pctl.)
below $11,565 below -$9,018
Lower-Middle Class
(7th to 32nd pctl.)
$11,566 – $30,435 -$9,019 – $18,210
Middle Class
(32nd to 82nd pctl.)
$30,436 – $109,914 $18,211 – $483,420
Upper-Middle Class
(82nd to 98th pctl.)
$109,915 – $417,175 $483,421 – $4.4 million
Upper Class
(above 98th pctl.)
above $417,176 above $4.4 million

I would imagine that the income figures make sense to readers, but not the wealth figures. In general, people seem to draw economic class lines based on income, and they often fail to appreciate how wealth varies and the impact of wealth on a household’s overall economic situation. Conretely speaking, the middle class has wide ranges in wealth, which sit between the rough equivalent of a year’s worth of poverty line income and nearly a half million dollars.

An alternative, ad hoc division might look like this. The typology captures how a very large proportion of society has next to no wealth. While 7% of society’s households are “poor” in income terms, nearly a quarter of them are “wealth” poor. The middle 50% has some wealth, but not enough to cover a few years at the poverty line. Like income, wealth is concentrated in the top quarter, and most of this is concentrated in the higher ranks of this top quartile:

Wealth Class Net Worth Range
Bottom 25%
(min to 25th pctl.)
below $8,784
Middle 50%
(25th and 75th pctl.)
$8,785 – $81,456
Upper-Middle
(75th to 90th pctl.)
$81,457 – $315,712
Lower Top 10%
(90th to 95th pctl.)
$315,713 – $943,656
Top 5%
(95th to 99th pctl.)
$943,657 – $1.9 million
Top 1%
(99th to 99.9th pctl.)
$1.9 million – $7.9 million
Top 0.1%
(above 99.9th pctl.)
above $7.9 million

 


  1. Rich Morin and Seth Motel (2012) “A Third of Americans Now Say They Are in the Lower Classes” Research report from Pew Research Center. http://www.pewsocialtrends.org/2012/09/10/a-third-of-americans-now-say-they-are-in-the-lower-classes/
  2. Federal Reserve Board (2014) Survey of Consumer Finances Database at http://www.federalreserve.gov/econresdata/scf/scfindex.htm. Data were analyzed in R using scripts that were adapted from prior work of Anthony Damico, at http://www.asdfree.org