Do You Feel Rich? - the finance of Americans

Kiplinger's Personal Finance Magazine, Jan, 2000 by Melynda Dovel Wilcox

AFFLUENCE | Our exclusive PROSPERITY INDEX answers the question: Just how rich is America, anyway?

THE AVERAGE American household will greet the new millennium with a grubstake of nearly $480,000, according to the exclusive Kiplinger Prosperity Index. The index, first published in 1986, measures current wealth--household spending and net worth--plus future wealth--the current value of income Americans will collect eventually from pensions and social security.

Odds are, having slow-motion access to a tad less than a half-million dollars doesn't make the average American

FINISHING STRONG

Kiplinger's introduced its prosperity index in 1986 as a way to answer the question, "How are we doing?" At the time, most measures of prosperity concentrated on income-an unsatisfactory yardstick because income doesn't necessarily include government entitlement programs, fringe benefits and capital gains.

Designed by Joel Popkin and Co., an economics-consulting firm in Washington, D.C., the Kiplinger index sidesteps those problems. Instead of income, it measures prosperity by tracking how much U.S. households are spending and how much they have left afterward in financial and real assets-their net worth. The index also takes into account pension funds and future social security benefits-two sizable assets that people usually forget to include when totaling their wealth. household feel all that rich. And because it's an average--total American prosperity of $50 trillion divided by 104 million households--there's no doubt that the household balance sheets of Americans with names like Gates and Buffett are pushing the figure up. But after sorting through the mathematical footnotes built into any such statistical exercise, we're left with this salient fact: America is richer than ever. What's more, a look at the changes in the mix of household assets over the past decade tells a lot about how we got that way.

* More of our wealth is in the stock market. In 1989 stocks and mutual funds accounted for only 16% of the financial assets of a typical household. Today, after a decade-long bull market, that proportion has risen to 30%--or $85,000 per household--not counting stock investments held in 401(k) plans.

* We're better prepared for retirement. The second-biggest chunk of household assets--$87,000--is in pension assets, including 401 (k) plans.

* Home equity has actually declined, even though home prices nationwide appreciated faster than inflation. At $96,000, home equity is still the biggest slice of household assets. But during the '90s households took on a large amount of mortgage debt, either by trading up to bigger homes, making smaller down payments or borrowing against their home equity.

Homeowners who refinanced their mortgages in 1998 increased their mortgage debt by 11% of the value of their homes, on average, according to Freddie Mac--which helps explain why Americans have been able to spend money faster than their incomes were growing.

* We have a growing penchant for plastic. Credit card balances grew by 23% over the decade, after inflation. That doesn't necessarily mean we got deeper in debt. Instead, we replaced cash with credit card purchases, encouraged by rebate offers and just plain convenience. A significant minority of credit card holders--40% to 50%--continue to pay their bills in full each month.

* Prosperity is more evenly spread across the country. Among the four geographic regions, the South and Midwest have traditionally had the lowest levels of prosperity per household. But they grew the fastest over the past decade, closing the gap with the Northeast and West. The Midwest was the only region in which average home equity did not decline.

Who's got it?

WHILE THE NATION as a whole has certainly become wealthier, it's still not clear how different population groups are sharing in that prosperity. Since the end of the 1990 recession, the decade of the '90s has been a carbon copy of the '80s, with a big stock-market boom and low inflation, says John Weicher, an economist at the Hudson Institute. "In the '80s people were ready to believe that the distribution of wealth had become more unequal, but that didn't happen," says Weicher. "Now in the '90s people are ready to believe the same thing. But we should withhold judgment."

New data expected soon from the Fed could shed more light. But over the past 30 years or so, the richest 1% of the population (those with a minimum of $2.5 million in net worth) has owned about 30% to 35% of the nation's wealth, and that hasn't changed much.

There's no question that stock-market gains are enjoyed mostly by the wealthy. Nearly 90% of all stock is owned by the wealthiest 10% of households.

Yet many of America's rich got that way not because they own stock but because they are successful entrepreneurs or own their own businesses or professional practices. "People start out as ordinary workers and become wealthy with their own businesses, and altogether these firms add up to a lot," says Marvin Kosters, director of economic policy studies at the American Enterprise Institute. "They're much more pervasive than the Microsoft workers who made millions on stock options."