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Struggling Housing Market Leads to Income Inequality Between Young and Old

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Struggling Housing Market Leads to Income Inequality Between Young and Old

By JACOB KANCLERZ

Spartan Online Newsroom

LANSING – In a 25-year span, older householders’ wealth increased 42 percent, while the youngest households decreased 68 percent, despite income growth for both groups.

Economists say the lagging housing market has affected the young’s wealth. The traditional means of accumulating wealth – the value of a home – isn’t feasible for today’s generation, and could ultimately hamper their ability to ascend the economic ladder, experts say.

The report on the age gap in wealth, released by the Pew Research Center in Nov. 2011, adds a new dimension to the debate on economic inequality, spurred by spending wars in Washington and the rise of the Occupy Wall Street movement that swept across the nation last fall.

The Pew report found the median net worth of householders 65 and over increased from $120,457 in 1984 to $170,494 in 2009. Householders 35 and younger saw their net worth fall from $11,521 to $3,662 in the same time period.

It’s no surprise older households have more total wealth, said Richard Fry, a senior economist at the Pew Research Center and one of the main authors of the study. However, the increase in the gap, and the decrease in net worth for younger households, is concerning.

“Granted, the young have never been particularly wealthy. They weren’t even back in 1984,” he said. “But unlike the old, who have rising accumulation, what we see among the young is they never had a whole lot to begin with, but now they have even less.”

The median net worth for the youngest households, $3,662, is enough to last a typical family one month, said Charles Ballard, an economics professor at Michigan State University.

“That’s zero, that is essentially zero,” he said about the median net worth of younger households.

The wealth gap increased between the age groups despite each seeing an increase in income over 43 years. However, older households’ income went up 109 percent between 1967 and 2010. Younger households only saw a bump of 27 percent in the same time period.

Fry said the gap is primarily due to the housing market collapse. Younger people who bought homes recently have seen its value decline, while many older people bought houses long ago, before housing prices dropped. The decline in home equity for the young could make it harder for them to accumulate wealth, because home equity makes up a large portion of people’s net worth, Fry said.

“The American dream was you buy a house, it increases in value, it’s a nest egg for retirement,” said Paul Menchik, an economics professor at Michigan State University. “That hasn’t worked out that way right now, and it’ll be a while before house prices start rising again.”

Fry said the worst of the recession is over, and the price of housing is cheaper now, which could make it easier to buy a home and see its value go up. But he said there’s still a lot of uncertainty with the housing market and what role it will play in future generations’ chances at prosperity.

For older householders, a gradual increase of income from programs like Social Security and Medicare has also contributed to their wealth.

Social Security was introduced in 1935 as a way to combat the elderly poverty rate, and experts agree that it has been successful. According to the Pew report, the poverty rate for the oldest households has decreased from 33 percent in 1967 to 11 percent in 2010.

However, in the same time period, the youngest households’ poverty rate increased from 12 percent to 22 percent. The reversal has shown the effectiveness of Social Security, said Menchik, but it has also led to calls to limit Social Security only to those who need it.

Fry attributed another factor of the gap to reductions in younger households’ safety net –essentially, welfare. Demographic changes, like the increase in single parent and minority householders, also play a role. Single parent households and Hispanics tend to have high poverty rates, he said.

Mounting college debt for younger households contributes to their decrease in wealth, with loans eating away at many graduates’ net worth. While having a college education has shown to increase a person’s wealth over time, tuition has risen so much that it has made wealth accumulation difficult, Ballard said.

Michigan is an example of rising college debt, indicated by a recent investigation by The Center for Michigan’s Bridge Magazine. Bridge found 12 of 15 Michigan’s public universities have higher net student costs than the median of similar universities nationwide. Michigan students pay more in loans ($1.8 billion) than the state pays for the entire higher education budget ($1.26 billion), according to Bridge.

 

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