Fed paper reveals rising wealth inequality in retirement

A new Federal Reserve paper introduces an annualized measure of comprehensive wealth, finding that median household wealth increases throughout retirement primarily for college-educated and White households. Other groups experience flat or declining wealth trajectories after retirement.

The wealth of generations

The Federal Reserve paper introduces an innovative measure of comprehensive household wealth, termed Annualized Comprehensive Wealth (ACW).

This metric expands beyond traditional net worth by incorporating the actuarial present values of expected future income streams.

These streams include labor-market earnings, Social Security benefits, defined-benefit pensions, annuities, life insurance payouts, and various government transfers.

The study, drawing on the 1998-2022 waves of the Health and Retirement Study, converts this lump sum into an actuarially fair joint life annuity.

A key finding is that the median ACW generally increases throughout retirement, suggesting that the median household depletes its total resources at a slower pace than its joint life expectancy shortens.

This nuanced approach provides a more holistic view of financial well-being in later life.

A stark picture of retirement disparity

Despite the overall median increase, the research documents significant heterogeneity in ACW levels and trajectories across different demographic groups.

Notably, the pattern of rising ACW is predominantly observed among college-educated and White households.

In contrast, other demographic segments, including less-educated individuals and Black and Hispanic households, exhibit relatively flat or even declining ACW trajectories after retirement.

The paper further explores this inequality using recentered influence function regressions, revealing that disparities in ACW are strongly associated with higher household-specific rates of return, greater educational attainment, and a higher concentration of single-headed households, alongside racial and ethnic factors.

Beyond traditional metrics

This research provides crucial empirical evidence for the widening gap in retirement security, moving beyond traditional wealth metrics.

The findings underscore the systemic challenges faced by less privileged demographics in accumulating and maintaining comprehensive wealth throughout their post-employment years.

Policymakers must address these structural inequalities to ensure broader financial well-being and stability in an aging society, where disparities could otherwise deepen.