Net worth, or why Americans are not as wealthy as they think

By BJ Bjornson

A week or so ago, John put up a post describing the difference between one�s income and one�s net worth, the latter being another way of determine just how wealthy one is. It is a very important concept, particularly for this point.

Building net worth is everyone's safety net for the future.

Or, to put it another way, your net worth is what you use and/or borrow against when you no longer have any income to maintain your lifestyle. It is your security against hard times, and your hope for a decent retirement. If you have little or, as is too often the case these days, negative net worth value, you have no security and little hope for a secure future.

As John noted, most people focus on income when they speak of riches, and when the U.S. is spoken of as one of the richest countries in the world, it is usually by a measure of per capita GDP, or the average income per person based on the GDP of the country, where the U.S. always comes out near the top outside of a group of small, usually oil-rich, countries where the GDP per capita can be greatly skewed by a single great revenue driver.

When one looks at wealth, though, and particularly median wealth rather than average, a very different picture starts to emerge, as this article at The Daily Reckoning points out.

According to the article, the average wealth of people in Britain and the U.S. is $258,000 and $248,000 respectively. Not a lot a difference there, but when you look at the median instead of the average, which tells you a lot more about what the typical net worth actually is. For Britain: $121,000. For the U.S.: $53,000. Less than half, and that�s not an aberration.

What this means, says our Bonner Family Office chief economist, Rob Marstrand, is that �wealth in America is heavily skewed to the rich, with a lot of adults with very little net worth.�

Compared to the typical Japanese or European, the typical American is only half as rich. Half the people in the US have less than $53,000 net worth. You can imagine what the bottom 20% have.

This is a devastating and grim insight. It explains why so much of America seems, well, so poor. Because it is poor. People don�t have any money. They dress poorly. Eat poorly. Live poorly.

This skewing of wealth has been intentional, and it is only going to get worse. There is a generational cost hidden in that data. Take as an initial example the cost of college or university education. This article from the NYT tells a part of the story:

Over all, the report found, published college tuition and fees increased 439 percent from 1982 to 2007 while median family income rose 147 percent. Student borrowing has more than doubled in the last decade, and students from lower-income families, on average, get smaller grants from the colleges they attend than students from more affluent families.

. . .

Although college enrollment has continued to rise in recent years, Mr. Callan said, it is not clear how long that can continue.

�The middle class has been financing it through debt,� he said. �The scenario has been that families that have a history of sending kids to college will do whatever if takes, even if that means a huge amount of debt.�

More than just the straight cost of higher education, the less capital (or net worth) you have available, the less money you have to assist your children in pursuing that education. As noted, the only way around that is to add more debt, either to yourself or your children, and the servicing of that debt acts as a drag on your and their ability to create a nest egg of capital to fall back on, or to use to assist their children.

Even worse is the fact that the sacrifices people make to send their children to post secondary schooling no longer pay off the way they used to, at least unless your family is already well-connected.

This kind of drain continues elsewhere. No extra money lying around to help out with a downpayment or cosigning on a car loan, or for a mortgage, or anything else you might want to do to give them a good start in life because you�re still stuck paying down your own debts when they�re ready to get started.

Worse, without a nest egg or retirement income, you�re pretty much forced to depend on them or other family members to look after you when your own productive years end. That at least is nowhere near as bad as it once was, but should the Republicans and others of their ilk get their way and gut or destroy Social Security and Medicare, that problem is going to return to its previous hellishness for the elderly poor.

All of which points to the reasons that social and economic mobility in the U.S. has dropped below where it is for most other first-world nations and why the �American Dream� is now more and more becoming a true fantasy.

Increasingly, the "richest country in the world" is just a place where a lot of really rich people happen to live.