Roaring '90s Didn't Leave Middle Class With Much Cushion

During the roaring '90s, the average U.S. household didn't rack up the big financial gains one might have expected.

Though wealthier families did well over the past decade, those in the middle class watched their net worth stagnate, according to Edward Wolff, an economics professor at New York University. As a result, many Americans are at financial risk as the economy continues to weaken.

"Financial liquidity allows families to weather sharp drops in income caused by job loss, divorce or illness," wrote Wolff in a recent study. "The failure of a large portion of the population to accumulate any meaningful savings thus increases the fragility of the middle class."

Salaries and Household Wealth Grew Slowly in the '90s

Consider one of the most important components of financial stability for many Americans: salary. For all the hubbub about the economic boom, gains came slowly for the typical full-time U.S. worker. According to the Commerce Department, the average salary increased an inflation-adjusted 1.6% a year between 1990 and 2000, for a total increase of about 17.4%.

While that's a sizable increase over time, the average U.S. worker didn't make out nearly as well as top management, which reaped double-digit annual gains during certain years. Average compensation for CEOs at 50 leading companies grew an inflation-adjusted 13.4% between 1999 and 2000, according to statistics from executive pay consultant Pearl Meyer & Partners.

In addition, median net wealth -- the midpoint between the richest and poorest households -- grew only 4% between 1989 and 1998, according to information from the Federal Reserve's Survey of Consumer Finances.

During the same period, mean household net wealth grew 11%. The difference between median and mean increases reflects the fact that the more affluent gained disproportionately, boosting the value of average wealth. According to the Fed's surveys, the wealthiest 10% of households accounted for 80% of the gains in net worth between 1983 and 1998, while the middle 20% reaped only 1.9% of the gains.

More Affluent Households Reaped Biggest Gains in Wealth in the '80s and '90s Average net worth by wealth class, 1983-98 (in thousands, 1998 dollars)
	Top 1%	Next 4%	Next 5%	Next 10%	Next 20%	Middle 20%	Bottom 40%	All
1983	7,175	1,187	516.2	278.7	133.6	55.5	4.7	212.6
1998	10,204	1,441	623.5	344.9	161.3	61.0	1.1	270.3
% Change	42.2%	21.4%	20.8%	23.7%	20.7%	10.0%	-76.3%	27.1%
% of Gain	52.5%	17.7%	9.3%	11.5%	9.6%	1.9%	-2.5%	100.0%
Source: Surveys of Consumer Finances, quoted in Wolff study

Wealthier households gained more partly because rich people, who traditionally own a greater quantity of stocks, benefited from the market's strong performance.

Though nearly half of U.S. households owned stock, most had only a minor stake in the market, Wolff points out. According to Fed data, less than a third of U.S. households owned at least $10,000 in stock.

Many Americans have few assets other than their homes, which puts them in even greater financial jeopardy now that incomes are at risk. Indeed, an increasing number of people may see their salaries decline, even if they manage to avoid layoffs. "There have been cutbacks at companies from five to four [working] days," says Wolff. "There's also going to be a big contraction in bonuses." And workers who rely on tips for income will likely suffer as discretionary spending contracts.

Debts Are an Increasing Burden for Many Families

Not only did middle-income households fail to accumulate wealth during the '90s, they went on spending binges and fell deeper into debt. "The most disturbing trend is the rising indebtedness of American families, with the household debt as a percentage of household equity climbing from 15 percent to 18 percent," wrote Wolff in his study.

The Rich Draw Most of Their Wealth From Equities and Businesses, While the Middle Class' Biggest Asset Is Their Homes Composition of household wealth by wealth class, 1998 (% of gross assets)
Component	Top 1% of Population	Middle 60% of Population
Principal residence	7.8%	59.8%
Liquid assets	5.0	11.8
Pension accounts	6.9	12.3
Corporate stock, financial securities, mutual funds and personal trusts	31.6	5.5
Business equity and other real estate	46.9	8.8
Miscellaneous assets	1.8	1.8
Total assets	100.0	100.0
Source: Surveys of Consumer Finances, quoted in Wolff study.

The problem wasn't credit cards: Surprisingly, consumer debt fell between 1983 and 1998.

Instead, Wolff says mortgages, second mortgages and home equity loans caused the rise in debt. And with interest rates dropping, the trend has only accelerated.

"If anything, [consumers'] debt structure has shifted even more toward mortgage debt over the last few years," he says. Worse, many consumers used the proceeds from cashing out home equity to buy consumer goods instead of paying down other debts.

Wolff reckons home foreclosures and bankruptcies will rise as the economy continues to deteriorate, given the shaky footing of many U.S. households. "When this recession hits, even the small gains the middle class made will be reversed again," he says.