Inequality in Annualized Comprehensive Wealth Across US Retirement Cohorts

 Annualized Comprehensive Wealth (ACW) is a broad measure of household resources designed to evaluate retirement security by converting total wealth into an actuarially fair joint life annuity. It serves as a metric to determine how much a household can sustainably consume annually over its expected remaining lifetime.

The sources highlight several key aspects of ACW within the context of wealth inequality:

Definition and Composition of ACW

• Comprehensive Wealth (CW): Before annualization, the sources construct "comprehensive wealth" by augmenting traditional net worth with the actuarial present values of future payment streams. These include labor-market earnings, Social Security, defined-benefit (DB) pensions, annuities, life insurance, and government transfers.
• Calculation: ACW is calculated by dividing this total lump sum by an annuity price ($P$) that accounts for household size, age-dependent survival probabilities, and a real interest rate.
• Purpose: The primary advantage of ACW over traditional net worth is that it allows for meaningful comparisons across households of different ages and sizes by accounting for differences in household composition and expected longevity.

Trajectories and Heterogeneity in Retirement

• The "Rising ACW" Trend: For the median household, ACW tends to increase throughout retirement. This suggests that households typically spend down their total resources more slowly than their remaining joint life expectancy is shortening.
• Demographic Divergence: This upward trajectory is not universal. It is largely driven by college-educated and White households. In contrast, other demographic groups—such as Black and Hispanic households or those with less education—show relatively flat or declining ACW trajectories as they age

In the study of Inequality in Comprehensive Wealth, the sources define Annualized Comprehensive Wealth (ACW) as a measure that converts total household resources—including net worth and the present value of future income streams like Social Security and pensions—into a sustainable annual consumption amount based on life expectancy. The "trajectory" of this wealth refers to how ACW evolves as households age through retirement.

General Trajectories in Retirement

The sources report that, for the median household, ACW tends to rise throughout retirement. This upward trajectory indicates that the typical household is spending down its resources more slowly than its joint life expectancy is shortening. This behavior contrasts with simple life-cycle models but is consistent with models accounting for:

• Precautionary motives regarding uncertain longevity and rising out-of-pocket medical expenses.
• Bequest motives, where households intentionally preserve wealth to leave to heirs.
• Frictions in the housing market, such as imperfect reverse mortgage markets that prevent households from easily liquidating home equity for consumption.

Heterogeneity and Inequality

While the median ACW rises, this pattern is not universal. The sources highlight considerable heterogeneity in trajectories, which directly contributes to widening inequality in retirement.

• Education and Race: The rising trajectory of ACW is primarily driven by college-educated and White households. In contrast, households with less education (e.g., those without a high school degree) and Black or Hispanic households often show flat or even declining trajectories. For instance, while White households see ACW increase after age 70, the median trajectory for Black households is essentially flat, and it actually falls for Black and Hispanic members of the Silent and Older generation.
• Wealth Brackets: Inequality is further underscored by wealth levels. For the top 10% of households, ACW rises dramatically at the oldest ages, meaning their wealth becomes increasingly large relative to their remaining life expectancy. For the bottom 10%, the trajectory remains flat at a very low level.
• Asset Returns: Household-specific rates of return on assets like equities and housing are major drivers of these divergent trajectories. Higher-wealth, college-educated, and White households tend to have greater exposure to equities, allowing them to benefit more from market recoveries, such as the run-up following the Great Recession. Conversely, less-educated and non-White households disproportionately exited the stock market after 2008, missing out on significant asset price increases.

Broader Context of Inequality

The sources suggest that inequality in ACW increases with age. This widening gap is shaped by several structural factors:

• The Transition in Pensions: The shift from traditional defined-benefit (DB) pensions to defined-contribution (DC) plans like 401(k)s has increased wealth inequality, as DC plan outcomes are more dependent on individual saving decisions and market movements.
• Social Security as an Equalizer: Social Security remains the most critical resource for households lower in the wealth distribution, significantly reducing overall wealth inequality; without it, the 75-25 wealth ratio would rise from 4.7 to 7.3.
• Survivorship Bias: Because wealthier individuals tend to live longer, the households observed at very advanced ages are increasingly drawn from higher-wealth groups, which mechanically increases measured inequality among the oldest cohorts.

Ultimately, the sources conclude that gaps in retirement preparation across education and demographic groups are likely to widen as households age, driven by differences in portfolio composition, labor-market attachment, and the realization of household-specific asset returns.

In the context of Inequality in Comprehensive Wealth, the sources identify several systemic and household-level drivers that shape the distribution of retirement resources. While traditional net worth is a significant factor, Annualized Comprehensive Wealth (ACW) reveals that inequality is driven by a complex interplay of asset market fluctuations, shifts in pension structures, and demographic characteristics.

1. Household-Specific Asset Returns

One of the most significant contributors to wealth inequality is the heterogeneity in real rates of return on assets like equities, fixed-income instruments, and housing.

• Portfolio Exposure: Households with higher ACW typically have greater exposure to financial wealth and equities. This exposure allowed them to benefit disproportionately from the long-term run-up in the stock market following the Global Financial Crisis.
• Market Timing and Exit: In contrast, less-educated and non-White households were more likely to exit the stock market following the 2008 crisis, causing them to miss out on subsequent historic asset price increases. This divergence in realized returns is a major driver of the widening 90–10 ratio and Gini coefficient.

2. The Transition from DB Pensions to DC Plans

The structural shift in how Americans prepare for retirement has fundamentally altered wealth distribution:

• Increased Risk and Responsibility: The move from defined-benefit (DB) pensions to defined-contribution (DC) plans (like 401(k)s) has made retirement security more dependent on individual decisions regarding saving and asset allocation.
• Greater Dispersion: The sources note that the 75-25 ratio for retirement account wealth is approximately 19.5, compared to only 9.8 for DB pension wealth. This suggests that the DC-based system is associated with significantly higher wealth inequality over time.

3. Education and Lifetime Earnings

Education serves as a primary driver of inequality, acting as a proxy for lifetime earnings, financial literacy, and survival expectations.

• Trajectory Gaps: Median ACW for college graduates is over $100,000 and generally rises as they age, whereas it remains flat or even declines for those without a high school degree.
• The College Premium: The rise in the college wage premium since 1980 has increased the lifetime earnings—and thus the comprehensive wealth—of more recent generations of college graduates relative to their less-educated peers.

4. Racial and Ethnic Disparities

Stark differences in ACW levels exist across race and ethnicity, with Black and Hispanic households holding between half and three-quarters the annual resources of White households.

• Explained Factors: Using the Oaxaca-Blinder decomposition, the sources find that the majority of these gaps are accounted for by observable characteristics, including differences in education, bequest expectations, and household returns.
• Intra-group Dispersion: Even after controlling for these factors, a higher share of Black or Hispanic households is statistically associated with higher overall inequality, reflecting considerable dispersion within these demographic groups.

5. Life-Cycle Factors and Expectations

Individual behaviors and expectations regarding the end of life also drive inequality as households age:

• Bequest Motives: Wealthier households are more likely to preserve assets to leave as inheritances, leading to an upward-sloping ACW trajectory at older ages.
• Medical Expenses: The rising variance of out-of-pocket medical expenses and long-term care shocks at older ages creates a "precautionary buffer" motive that affects wealth drawdown differently across the distribution.
• Survivorship Bias: Because wealthier individuals tend to live longer, the pool of households observed at very advanced ages is increasingly composed of higher-wealth individuals, which mechanically increases measured inequality in the oldest cohorts.

6. Social Security as a Mitigating Factor

While the factors above drive inequality, Social Security acts as the most critical equalizer. It is the dominant resource for households in the lower half of the wealth distribution. The sources highlight that without Social Security, the ratio of comprehensive wealth at the 75th percentile to the 25th percentile would jump from 4.7 to 7.3.

In the context of Inequality in Comprehensive Wealth, the sources analyze cohort differences by comparing the Silent and Older generation (born 1945 and before), Early Baby Boomers (born 1946–1954), and Late Baby Boomers (born 1955–1964). While all cohorts share some general trends, such as rising wealth trajectories in retirement, they differ significantly in their resource levels, the composition of their wealth, and their vulnerability to economic shocks.

1. Resource Levels and Composition

• Higher Average Wealth in Younger Cohorts: Younger cohorts (Baby Boomers) have arrived at the start of retirement with greater average resources than their elders. For households aged 61–70, the average Annualized Comprehensive Wealth (ACW) across these cohorts ranges between $75,000 and $100,000.
• Shift in Wealth Type: There is a notable shift in the composition of wealth between generations. Older cohorts relied more on annuitized wealth (such as defined-benefit pensions), while younger cohorts hold a larger share of financial wealth (including 401(k)s and IRAs) and expected labor earnings.
• Labor-Market Attachment: Younger cohorts exhibit a growing share of wealth from earnings, reflecting a higher labor-market attachment compared to previous generations.

2. Trajectories and Drawdown Patterns

• Rising ACW Across Generations: At the median, ACW generally increases with age for all three cohorts. This suggests that across generations, households are spending down their resources more slowly than their life expectancy is shortening.
• The "Great Recession" Impact: Cohorts experienced the 2008 financial crisis at different life stages, leading to divergent ACW outcomes:
  • Early and Late Boomers were in their 50s and 60s during the recession and experienced substantial drops in ACW due to higher exposure to housing and equity markets.
  • The Silent and Older Generation experienced only a modest drop followed by a steep increase, likely due to less exposure to these volatile markets.
  • Recovery: While Early Boomers recovered much of their recession-era losses, Late Boomers had only partially recovered by the end of the sample period.

3. Cohort-Specific Inequality

• Initial Inequality: Measures such as the Gini coefficient and 90–10 ratio suggest that inequality was higher at younger ages (51–60) for more recent cohorts compared to older ones.
• Pension Transition: The transition from defined-benefit (DB) pensions to defined-contribution (DC) plans has contributed to widening inequality within younger cohorts. The 75-25 ratio for retirement account wealth (common in younger cohorts) is 19.5, nearly double the 9.8 ratio for DB pension wealth (common in older cohorts).
• Education Gaps: The college wage premium that rose after 1980 likely increased the lifetime earnings of more recent generations of college graduates, widening the gap between them and their less-educated peers within the same cohort.
• Regression Insights: Interestingly, results from recentered influence function (RIF) regressions suggest that increasing the proportion of Baby Boomers relative to the pre-1948 generation might actually reduce overall measured inequality, though substantial inequality remains among the oldest households.

4. Racial Disparities Across Cohorts

The sources note that the stark gaps in ACW between Black and White households do not diminish with more recent cohorts. If anything, these disparities appear to be larger for younger generations, with White and non-Hispanic households showing a much faster rise in ACW than their Black and Hispanic counterparts as they age.

The sources examine Inequality in Comprehensive Wealth by applying four primary statistical measures to Annualized Comprehensive Wealth (ACW): the Gini coefficient, the 90–10 ratio, the top 10 percent share, and the Theil index. Using these measures, the researchers identify how retirement resource inequality evolves across age, time, and demographic groups.

Trends in Inequality Measures

• Increase with Age: Most inequality measures show that inequality in ACW generally increases as households age, particularly for older cohorts. This is attributed to factors such as survivorship bias (wealthier individuals live longer), differing bequest motives, and the increasing variance of out-of-pocket medical expenses in later life.
• Cohort Differences: Inequality was generally higher at younger ages (51–60) for more recent cohorts (Baby Boomers) compared to the Silent and Older generation. This shift is partially linked to the transition from defined-benefit (DB) pensions to defined-contribution (DC) plans, which introduces more dispersion based on individual saving and investment choices.
• Impact of Economic Cycles: Inequality measures fluctuated significantly between 1998 and 2022. Inequality fell during the peak of the Great Recession (2010–2012) as sharp declines in housing and equity prices "shaved" more wealth from the top of the distribution. However, inequality increased markedly through 2018 as financial asset prices recovered, disproportionately benefiting higher-wealth households with more equity exposure.

Drivers of Inequality (RIF Regression Analysis)

To understand what drives these statistics, the sources use Recentered Influence Function (RIF) regressions, which estimate how specific household characteristics affect a distributional measure like the Gini coefficient.

• Asset Returns: Household-specific rates of return are strongly and positively associated with inequality, particularly the Gini and 90–10 ratio. Wealthier households often have higher exposure to equities, and the resulting higher returns magnify wealth dispersion over time.
• Education: A higher share of college-educated households is associated with higher inequality across all four measures, while a higher share of high-school–educated households is associated with lower inequality.
• Race and Ethnicity: Higher concentrations of Black or Hispanic households are associated with significantly higher inequality in ACW, reflecting considerable dispersion within these groups even after controlling for other characteristics.
• Bequest Motives: Interestingly, a higher probability of leaving or receiving a bequest is associated with lower inequality. This suggests that many households in the middle of the distribution plan to leave bequests, and those expecting to receive them may have less incentive to accumulate extreme individual wealth.

Mitigating Factors

• Social Security as an Equalizer: Social Security is the most effective tool for reducing measured inequality in comprehensive wealth. The sources note that without Social Security, the 75–25 wealth ratio (the ratio of wealth at the 75th percentile to the 25th percentile) would rise from 4.7 to 7.3.
• Marital Status: Increasing the share of married households tends to reduce inequality, while larger household sizes are associated with a slight increase in inequality measures.