Changing Patterns in Household Ownership of Municipal Debt: Evidence from the 1989 – 2013 Surveys of Consumer Finances

Source: Daniel Bergstresser, Randolph Cohen, First draft May 2015, Current draft July 2015, paper presented at the presented at the 5th Annual Municipal Finance Conference, 2016

Municipal debt is often owned directly by households. and direct investment by households remainsan important part of municipalities’ ownership structure. But a new paper from Daniel Bergstresser at Brandeis International Business School and Randolph Cohen at the Massachusetts Institute of Technology finds that more and more households are investing in tax-deferred accounts such as 401(k)s, 403(b)s, and IRAs, as opposed to municipal bonds. Because municipal bonds’ tax-exemption reduces their pre-tax yields, they are an unusual—and even inappropriate—asset for tax-deferred accounts. The result is that, since 1989, ownership of municipal debt has become increasingly concentrated among the wealthiest households. From 1989-2013, the share of households holding any municipal debt fell by almost half—from a 4.6 to 2.4 percent. The share of total debt that is held by the wealthiest 0.5 percent of households rose from 24 percent to 42 percent during that same time period. The demographic change is important because ownership of debt by voters affects the political will of borrowers to repay.