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The rich borrow, too

Liability distribution across rich and poor households


Over the past  few  weeks, we’ve used data from a dataset compiled by the Federal Reserve Board specifically to analyze the distribution of data across households. While our target so far has been assets, today we look at liabilities. How do rich and poor households borrow?

The graph above shows the total liabilities of four wealth classes: the top 1%, the next 9%, the next 40%, and the bottom 50%. At first glance, it appears that richer households hold less in liabilities. But if you hover over the graph, you see the actual percentages: the top 1% hold 4.6% of all liabilities, the bottom half 36%. One might assume the rich borrow less and the poor borrow more. But to better understand this, let’s take a look at the major categories on the liability side of things.

The first category is mortgages, shown in the second graph. Poorer households are less likely to own a home, and when they do it is a smaller home. As they have less funds, they need proportionally larger mortgages to own those smaller homes. Richer households need smaller mortgages, but they have a fiscal incentive for larger mortgages, as mortgage interest is deductible from their taxes and their tax rates are likely higher. In the end, we see that the top 1% hold 4.2% of all mortgages, while the bottom half has 39%.

The second category is consumer credit, on shown in the bottom graph. This includes credit cards, student loans, car loans, and other similar liabilities. Here the bottom half amasses 54% of the total debt; quite obviously they borrow to make many purchases. But the top 1% also punch above their weight with 2.1% of total consumer credit. How come? One reason is that expensive but highly rewarding courses of study (medicine, law) contribute quite a bit to student debt. Also, the consumer credit numbers include credit card balances paid in full (about 30% of credit card debt, or 7% of all consumer credit).

How these graphs were created: The procedure is the same for each graph. You can find these series in the Distributional Financial Accounts or the Levels of Wealth by Wealth Percentile Groups release table; check the series you want, and click “Add to Graph.” From the “Edit Graph” menu, open the “Format” tab to choose graph type “Area” with stacking “Percent.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: WFRBLB50101, WFRBLB50102, WFRBLB50103, WFRBLN09047, WFRBLN09048, WFRBLN09049, WFRBLN40074, WFRBLN40075, WFRBLN40076, WFRBLT01020, WFRBLT01021, WFRBLT01022


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