The evolution of wealth over the life cycle

Most current sources of wealth data are crosssectional, meaning that age differences have generally been studied cross-sectionally (Milligan 2005; Meh et. al. 2009). However, age group differences may not be representative of cohort differences, since the economic conditions faced by each cohort varied considerably. One way to study cohort differences is to follow birth cohorts through a succession of surveys because cross-sectional surveys are typically designed to be representative of the population in different age ranges. This synthetic cohort technique can be applied to wealth surveys conducted in 1977, 1984, 1999 and 2005 (see Data sources and definitions) in order to study the evolution of financial wealth over the life cycle and across selected cohorts of Canadians. Despite different starting points, subsequent wealth accumulation converges across cohorts. Despite the similarities in wealth accumulation, assets and debts differed across cohorts. More specifically, individuals from the most recent cohort reported higher levels of both assets and debt in their prime working years compared to the other two cohorts. Among prime-age individuals, median assets for the 1999 cohort ($118,000 per adult) were 52% higher than for the 1977 cohort ($78,000) (Chart F). Median debt diverged even more as the 1999 cohort owed $38,000 at the median, compared to $13,000 for the 1977 cohort (Chart G).12 Hence, recent cohorts accumulated similar amounts of wealth to earlier cohorts by acquiring more assets and accumulating more debt.13 One widely used measure of dispersion is the P75/ P25 ratio-the wealth of a household at the 75th percentile divided by the wealth of a household at the 25th percentile. A P75/P25 ratio of 3.0, for example, would mean that a household at the 75th percentile is three times wealthier than a household at the 25th percentile. Results indicate that the dispersion of net worth is highest among young adults, but generally decreases as cohorts age (Chart H). Note that the dispersion of wealth increased across cohorts in the early stages of the life cycle. Even though the P75/P25 for the 1984 cohort eventually converged with the 1977 cohort, dispersion measures for the 1999 cohort are still well above the other cohorts. Thus net worth is more unequally distributed among more recent cohorts of young and prime-age adults than among earlier cohorts.