Is This Really a Reason for the Increasing Wealth Gap?
Businessweek presents us with an alleged reason for the increasing wealth gap: 401k plans. The theory here is that because so many low and middle-income people invested their 401ks in stocks prior to the 2008-2009 collapse of the stock market, their resulting lower net worth accounts for a widening wealth gap. Let's use our reason and common sense and see if this really makes sense.
First of all, if we're simply saying that one's net worth declines when one's stock holdings decline in value, then, of course, we would agree. But isn't this a trivial point? In fact, that's not the point here; rather we're presented with the following:
Question: How many people do you know who have such primary savings set aside for such expenditures? Do you? Indeed, most people sadly do not have such savings. They instead rely on lines of credit (credit cards), auto loans, home equity loans, etc. In other words, they don't save up in order to make such purchases; rather, they borrow and thereby take on debt. But, of course, there's a limit to how much debt any one individual or a single family can take on before their creditors either refuse to extend further credit, or - in cases where monthly payments aren't forthcoming - come a knockin' on your door.
But while we can lay some of the blame for the raiding of accounts on such spendthrift activity, we can't stop there. Not everyone who takes from their 401ks or other qualified accounts (e.g., 403bs, IRAs, Roth IRAs) wants the latest model Lexus, or builds a new "wing" on their already spacious McMansion. Some folks simply need the money to live, in light of the fact that their wages haven't increased - for decades. And while their wages stagnate, expenses don't. Even with the alleged low inflation we've seen in recent years, food, clothing and shelter all cost more. Throw in the cost of educating your children, which has increased dramatically as wages remain flat, and you've got a segment of the low/middle earners facing a steadily increasing cost crunch that for some has exceeded their ability to meet those costs.
Most of us already know this, if we haven't already experienced it ourselves, i.e., the great squeeze of wages that don't increase chasing ever the ever-increasing cost of goods and services, leaving us in need of sources of cash to buy the things we need and want. We can argue over the percentages of "needs" vs. "wants." And surely we'll come up with many whose spending encompasses more wants than needs, or at least more wants than they can really afford. I know this from personal experience. But I also know from personal experience, that a percentage of those grasping for cash in whatever form they can get it consist of people who simply can't afford what they need to live decent, dignified lives.
And herein we discover the devilish nature of the wealth gap in America, to a great degree a product of those flat wages chasing increasing expenses over the course of years, indeed decades. We refer specifically to those Americans working every day for wages that, once upon a time, provided a decent dignified life, but which now cause these same Americans to barely scrape by as they scratch at anything that could provide a few more dollars of cash to afford the basics components of a decent, dignified life: food, clothing, shelter, an education for their children and the hope of a modest retirement when they're too old to work. The phenomenon of people raiding their 401ks can be seen as a symptom of a broken economic system - at least for those Americans who aren't spendthrifts, who simply desire a modest security and sufficiency for their families -a system that permits, even encourages people to slip deeper in debt in order to keep the economy chugging along to the benefit of a dwindling percentage of participants.
One more thought: the irony now embedded into our economy appears to be the abundance of jobs available, but a lack of people with sufficient skills to fill them. On the one hand, we find commentary that deems the plethora of unfilled position as opportunities for those who either have or would acquire the skills needed. On the other hand, doesn't such a situation reinforce the impression that the system is somehow broken, if available jobs can't be filled because there aren't enough workers with the skills needed to fill them? At the very least, we can conclude that something's gone awry.
First of all, if we're simply saying that one's net worth declines when one's stock holdings decline in value, then, of course, we would agree. But isn't this a trivial point? In fact, that's not the point here; rather we're presented with the following:
The number of stock-owning middle and low earners rose around market highs (2001 and 2007), then dropped off after each crash. The share of middle- and low-income stock owners has been down since the recession, depriving them of the recent market gains. Meanwhile, high earners stuck with the stock market all along and got richer.You see, it was those middle and low-income stock owners who either sold their stock positions after the precipitous fall in 2008-2009, or who cut back on their participation in 401k plans subsequently, thereby missing the bull market gains starting in 2009 and continuing to the present. In contrast, high earners stuck with their stock positions, and thereby benefited from the rising market of the last five years. The question becomes why the difference here? Why did those regular folks either sell their positions or cut back on their stocks?
Since defined-contribution plans are many family’s primary source of savings, participation in these plans also fell after the recession, as many people raided their accounts and sold stock.Noting that "defined-contribution plans" refers here to 401ks, it seems reasonable to ask now why those low/middle earners relied on their 401k as their primary savings vehicles, a problem in and of itself. Why a problem? Simply put, one can't use an account that penalizes you when you withdraw money as your primary savings vehicle. Your primary savings vehicle ought to provide you with liquid funds you can access quickly in an emergency, as well as serve as a source of funds for large purchases like appliances, home improvements, cars, and the like.
Question: How many people do you know who have such primary savings set aside for such expenditures? Do you? Indeed, most people sadly do not have such savings. They instead rely on lines of credit (credit cards), auto loans, home equity loans, etc. In other words, they don't save up in order to make such purchases; rather, they borrow and thereby take on debt. But, of course, there's a limit to how much debt any one individual or a single family can take on before their creditors either refuse to extend further credit, or - in cases where monthly payments aren't forthcoming - come a knockin' on your door.
But while we can lay some of the blame for the raiding of accounts on such spendthrift activity, we can't stop there. Not everyone who takes from their 401ks or other qualified accounts (e.g., 403bs, IRAs, Roth IRAs) wants the latest model Lexus, or builds a new "wing" on their already spacious McMansion. Some folks simply need the money to live, in light of the fact that their wages haven't increased - for decades. And while their wages stagnate, expenses don't. Even with the alleged low inflation we've seen in recent years, food, clothing and shelter all cost more. Throw in the cost of educating your children, which has increased dramatically as wages remain flat, and you've got a segment of the low/middle earners facing a steadily increasing cost crunch that for some has exceeded their ability to meet those costs.
Most of us already know this, if we haven't already experienced it ourselves, i.e., the great squeeze of wages that don't increase chasing ever the ever-increasing cost of goods and services, leaving us in need of sources of cash to buy the things we need and want. We can argue over the percentages of "needs" vs. "wants." And surely we'll come up with many whose spending encompasses more wants than needs, or at least more wants than they can really afford. I know this from personal experience. But I also know from personal experience, that a percentage of those grasping for cash in whatever form they can get it consist of people who simply can't afford what they need to live decent, dignified lives.
And herein we discover the devilish nature of the wealth gap in America, to a great degree a product of those flat wages chasing increasing expenses over the course of years, indeed decades. We refer specifically to those Americans working every day for wages that, once upon a time, provided a decent dignified life, but which now cause these same Americans to barely scrape by as they scratch at anything that could provide a few more dollars of cash to afford the basics components of a decent, dignified life: food, clothing, shelter, an education for their children and the hope of a modest retirement when they're too old to work. The phenomenon of people raiding their 401ks can be seen as a symptom of a broken economic system - at least for those Americans who aren't spendthrifts, who simply desire a modest security and sufficiency for their families -a system that permits, even encourages people to slip deeper in debt in order to keep the economy chugging along to the benefit of a dwindling percentage of participants.
One more thought: the irony now embedded into our economy appears to be the abundance of jobs available, but a lack of people with sufficient skills to fill them. On the one hand, we find commentary that deems the plethora of unfilled position as opportunities for those who either have or would acquire the skills needed. On the other hand, doesn't such a situation reinforce the impression that the system is somehow broken, if available jobs can't be filled because there aren't enough workers with the skills needed to fill them? At the very least, we can conclude that something's gone awry.
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