Three years after the pandemic upended the American economy, U.S. household balance sheets in general are in good shape.
Assets far outstrip liabilities, with household net assets surging over the past decade to nearly $150 trillion last year.
Underneath this strength, though, there is a widening imbalance between those households with older and more educated workers, and the rest.
As household balance sheets have ballooned for older workers, many have retired. The implications are only now beginning to be understood.
Households under the age of 35, with little equity in their house, have an average net worth of roughly $75,000 on average, several studies have shown. Households over the age of 55, by contrast, have an average net worth of more than a million dollars.
But this imbalance is about more than just age. Years of historically low interest rates have fueled a surge in asset prices across many classes. Among those who benefited were households that already had savings in their retirement plans or owned a house—namely, older and more educated workers.
Central bankers were keenly aware of this dynamic. But it was seen as a necessary trade-off to stabilize the economy and secure the employment prospects for all Americans.
Now, the broader impact on the economy is emerging. Many workers 55 and older, feeling flush, have retired, part of what has become known as the Great Resignation.
Even as younger workers who left the workforce during the height of the pandemic take jobs again, older workers have stayed on the sidelines.
The end result is a labor market that is short millions of workers, forcing businesses to scramble for employees and keeping inflation high as they pay more to attract and retain their labor force.
For the Federal Reserve, this unintended consequence of the response to the pandemic is no small challenge as it tries to tame inflation.
The Great Resignation
A paper from the Federal Reserve Bank of St. Louis in May argues that wealth effects driven by the historically high returns in major asset classes such as stocks and housing may have influenced recent trends in the labor force participation rate.
The authors, Miguel Faria e Castro and Samuel Jordan-Wood, find that changes in net worth formed the basis for 80% of excess retirements in the post-pandemic period.
While the labor force participation rate for 25- to 54-year-old workers has finally recovered from both the financial crisis and the pandemic, the participation among older workers continues to drift lower.
While the labor force participation rate for prime-age workers has recovered, it continues to drift lower for older workers.
Their increased reluctance to work can be attributed to health concerns during the pandemic and the need to take on family responsibilities, or quite simply to their increased demand for leisure. This opting out by older workers was enabled by the accumulated assets, a lack of debt, and, ultimately, an increased net worth.
We would note that these labor market shocks are neither limited to the oldest workers or to the most recent episode. For instance, the youngest cohort of workers faced difficulties in joining the labor force during the pandemic. We can anticipate some lingering effects regarding their competitiveness with older workers or even more recent graduates.
And as we show, the last two financial and economic crises have had an effect on older workers.
Take the oldest of the baby boomers, who were born in 1946 and turned 65 in 2010, just as the economy was downsizing. Corporations took advantage of the financial crisis to send labor-intensive industries overseas, and the labor force participation rate for workers 55 and older plateaued at 45% for men and at 35% for women.
When the pandemic hit, the youngest baby boomers, born in 1964, were just turning 57. That pushed many to choose early retirement, selling their homes and never looking back.
The estimates of labor force participation for May confirmed these trends. For workers 55 and older, 38.4% were still in the labor force, a decrease of 1,5 percentage points from May 2019.
The participation rate for men in that age group was 44%, down 2.3 percentage points from the pre-pandemic level of 46.3%. For women, the rate of 33.4% was a 1.0 percentage point drop from 34.4% in 2019.
In comparison, prime-age workers (25 to 54) participated at a rate of 83.4%, an increase of 1,2 percentage points above the pre-pandemic level of 82.2%.
We see that as an indication of a labor market that is still hot, with the drain of older workers pressuring wages higher.
Household assets and liabilities
Household financial and nonfinancial assets continue to increase. Nonfinancial assets at the end of last year were $56.4 trillion, while financial assets were nearly double that at $110.7 trillion. Liabilities were $19.4 trillion.
We attribute the increase in financial assets over the past 10 years to a greater use of retirement accounts, profits from home sales and higher equity returns.
We attribute the increase in nonfinancial assets to the demand for housing and the increase in house prices, which coincides with the rapid increase in household liabilities because of mortgages.
In the absence of a severe economic downturn, we expect housing prices to remain elevated until the supply of housing catches up with demand.
American households have amassed nearly $150 trillion in net assets, with younger generations about to become the beneficiaries of an enormous transfer of wealth.
The debate over government debt always includes a warning about passing the debt burden to the younger generations, which of course is true. But with household financial assets of $110 trillion, it becomes obvious where at least some of the $34 trillion in federal and state and local government debt resides.
The recent increase in wealth has given many of the older cohort the ability to choose their lifestyle. For younger generations, the accumulated wealth of their parents affords them the security to go out on their own.
All of this adds to the Great Resignation and to the tightening of the labor market and the increase in wages after decades of stagnation.