Invisible Wealth: There’s A Good Chance You’ve Got It

You’re richer than you think.

No, this is not the beginning of a Positive Thinking sermon. A recent study indicates that the effective wealth of the median household is more than 5 times larger than what is usually measured.

Let me be specific: In 1992 the median household net worth by conventional measures was $40,100. When invisible wealth was counted it was $241,400.

Quite a difference.

I learned about this by following a footnote in a Federal Reserve Bulletin article on consumer finances. Most of these studies regularly provide the diligent reader with a footnote saying that pension wealth is not included because it is too difficult to measure. This footnote was different. Followed, it led to a paper by Arthur B. Kennickell and Annika E. Sunden, two economists with the Board of Governors of the Federal Reserve Board who wanted to estimate the wealth that escapes the usual survey.

What is this wealth?

It is our invisible wealth in promised pension and social security benefits. Those pension benefits can be very concrete… as in defined contribution plans. Or they can be very nebulous, as in defined benefit plans. They can also be a subject of public worry, as in Social Security benefits.

But if you have a promise of income, you have invisible wealth. You don’t have the visible promises of stocks, bonds, or cash investments but you have a supply of income that is yours to spend every month.

You would need to have a much larger sum in savings to generate that income. If, for instance, you retire with a corporate pension of $1,000 a month, you would need to have a bond portfolio worth over $171,000 if the average yield was 7 percent. At a 6 percent yield, you’d need an even larger portfolio, $200,000. Increase the monthly income from the pension and the portfolio needed to generate the income grows proportionately.

The actual value to you is measured differently: economists take the flow of expected income and discount it into a single lump sum. A retiree with a 13 year life expectancy and collecting $1500 a month might be said to have pension wealth of $153,363 if the income is discounted at 7 percent. The same idea applies to Social Security benefits.

However you figure it, these promises quickly mount to numbers that dwarf what most people have in home equity, savings, and other concrete assets. More important, they are vitally important to all but the highest income earners. The study found that pension and social security wealth accounted for 80 percent of net worth in all household income ranges up to $100,000 a year. ( see table below)

Pension and Social Security Wealth As A Percent of Conventional Wealth

Source: Federal Reserve Board of Governors

The researchers also found that both private pensions and Social Security worked to reduce the inequality of wealth. Households at the 90^th percentile, for instance, had a conventional net worth of $279,100— nearly 7 times the net worth of the 50^th percentile household at $40,200. But even though the net worth of the top ten percent ballooned to $901,700 when pension and social security wealth was added, it was only 3.7 times greater than the $241,400 total wealth of the median family.

The same effect was observed for lower income families: those at the 25^th percentile had a net worth that was only 20 percent of the median net worth using conventional measures… but it doubled to 40 percent when pension and social security wealth were included. ( Table 1, below, shows the figures)

Adjusting Our Idea of Wealth

Source: Federal Reserve Board of Governors

What does it all mean?

Simply this: We live in a world of promises. The promises made by employers and the government bear at least as much attention as our mutual fund or savings account choices.

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo by Karolina Grabowska

(c)  A.M. Universal, 1997