Wealth Rises At All Income Levels, But Faster At The Top

Congress reacted to the massive economic turmoil brought on by the pandemic with a series of large-scale interventions. Those helped boost wealth for all households. Lower-income and middle-income households dipped into their savings sooner than higher-income ones to pay their bills. The difference in financial emergencies and needs contributed to a renewed increase in wealth inequality during the current crisis.

Policymakers in Congress acted swiftly early in 2020 and then again in 2021 to counter the ongoing disruptions of the pandemic. Congress first passed the CARES Act in March 2020. A much smaller bill that delivered mainly stimulus checks – officially known as Economic Impact Payments (EIP) – followed December 2020. President Joe Biden then promoted and got Democratic lawmakers to pass the American Rescue Plan in March 2021 to counteract the economic slowdown that started in the fall of 2020.

Direct payments that benefited especially lower-income and middle-income households, mainly EIPs, sat at the core of these interventions. These large spending measures came in addition to regulatory assistance, for instance, federal and state moratoriums on rental evictions as well mortgage forbearance – modifications to existing mortgages.  

The combined measures had two effects on families’ finances. First, they had more money to spend as jobs dried up and costs, for instance, for childcare and health care went up. Second, many households could set some money aside. That way, they were prepared for the eventuality of more health and economic emergencies. After all, nobody knew and knows how long the pandemic will last and what additional disruptions the coronavirus and its variants will bring.

Wealth serves several functions for families. It allows them build up some money to leave to their children, to invest in their own future and to keep paying their bills when emergencies strike, as was often the case during the pandemic. Many families indeed used their built up savings as the pandemic lingered and the recovery continued throughout 2021.

Federal Reserve data on household wealth, known as the Distributional Financial Accounts, show these ups and downs in household wealth. The figure below shows the average liquid assets per household in the bottom three income quintiles from December 2019, just before the pandemic started, to September 2021, the latest quarter, for which data are available. Low-income and middle-income households were especially affected by the crisis and the pandemic. And, liquid assets reflect additional savings rather than boosts in house and stock prices. Average liquid assets, which typically reflect emergency savings, rose at the start of the pandemic in all three income groups. But, they started to gradually decrease for households in the bottom 20% after September 2020, while they peaked for the average household in the middle 20% in June 2021 (see figure below). Congressional actions helped many struggling households to build up some financial reserves, but lower-income households more quickly needed to dip into those reserves than was the case for higher-income ones.

Greater financial needs among those with less incomes then also contributed to widening income inequality. Total average household wealth grew by 10.4% in inflation-adjusted terms for those at the bottom, but increased by 20.6% for those in the fourth income quintile and by 18.2% for households in the top 20% (see figure below).

These gaps in wealth growth also appear by other, related characteristics. For instance, average wealth for households without a high school degree grew by 9.1% from December 2019 to September 2021, while the average wealth for those with a college degree increased by 14.1% during that same period. In the end, those households that needed wealth more to deal with the myriad challenges of the current crisis saw smaller wealth gains than those, who were already more financially secure.