Tuesday, March 9, 2010

Bifurcation of American Society Continues at Pace; Nearly Half Have Less than $10K for Retirement, A Quarter Less than $1K, but Millionaires Rebound Smartly

I won't get into all the dogmatic arguments that surround the massive income disparity in the US, we've discussed them in many other pieces.  (frankly I think wealth disparity - rewarding generations for nothing more than having the right genes - is a much larger problem the income disparity)  We must however understand "it is what it is" and Wall Street has entire thesis (plural?) built around it [Sep 7, 2009: Citigroup - America; A Modern Day Plutonomy

According to new Internal Revenue Service data announced last week, income inequality in the U.S. is at its worst since the 1920s (before the Great Depression). The top percentile of wealthy Americans earned 21.2% of all income in 2005, up from 19% in 2004, while the bottom 50% of wage earners earned 12.8% that year, down from 13.4% a year earlier.

Unlike the 1930s where the (much free-er) market "fixed" the problem of income disparity to a large degree, setting up the best years for America's middle class, government interference has reinforced (IMO) the disparity in the latter 2000s calamity.  Combined with the domestic economic system and encroaching global forces - I expect said disparity it to only continue go forward.  Indeed as written in various pieces I expect the next few decades to be an era where capital dominates.... and labor across the globe is set to fight amongst each other for the table scraps.  This is the basis of the most read entry in the history of FMMF written in 2007  [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?]   Takeaway - put yourself in a position to own capital since those with the wealth will continue to make the rules (i.e. cut the taxes for the top 1% or else we won't create jobs), or at minimum go work in government - especially of the federal kind - which is largely shielded from the current and future reality.  (until one day the masses don't take it anymore)  I won't even bother to offer any solutions because it will get caught up in "class warfare talk". :)  Instead, I will attempt to become one of the favored class - the dog eat dog capitalist. ;)


Aside from lack of income to derive any savings for a growing body of Americans, these stories below also cross reference with another of my favorite pet peeve projects; the long term emergency that is the retirement system.  This will mimic the mortgage disaster but over a much longer time frame.  Aside from the idea of not educating Americans in the basics during high school (economics, finance, stock market, balancing a check book, how credit affects you) and then setting them off in a world where institutions are dying to take advantage of the lack of financial acumen, we also have the issues of the mass migration away from defined benefit plans (pensions) to 401ks (again there are exclusions in the public sector when pensions still reign).  Many Americans - who can least afford it in the long run - also have been raiding their 401ks or IRAs to get through the Great Recession. [Jun 3, 2008: WSJ - Pinched Consumers Scramble for Cash]  While a true "free market" ideologue will say no one deserves to retire unless they self fund it, that theory is fine if we live in an academic vacuum - but that is not how it will work out in the real time political environment in the US.    As these emergencies grow over the coming decade(s), surely more printing and borrowing by federal government will take place to help those who have decided not to save - or cannot afford to. 

The last point which shall only add to the disaster we have coming is previous to the past few decades, many Americans (of the middle class variety) had a home paid off by the time they hit retirement age.  Therefore, the largest monthly expense disappeared off their needs (aside from property taxes) and the amount of income needed in retirement was hence far lower.  But due to the "I deserve this" culture of late, the home has instead turned into a piggy bank (ATM machine) with many people using equity to subsidize their lifestyle... and others using it to survive the global forces lapping at our shores.   With the piggy bank bankrupt and a great many Americans instead underwater, not only do many not have their home paid off but are basically starting at square one... starting a 30 year mortgage at age 48 or 54 is not going to get these folks where they need to be, to have that cushion.  Until they hit their 80s.  Therefore the problem for the coming generation of retirees will only be increased as many will be making full mortgage or rental payments at ages 65, 70, 75 ...

Let's look closer at the growing economic class schism, from a retirement point of view.  This is great to keep in mind as the pundits shout at you Wall Street = Main Street.  (especially important to shout during bailouts) I've countered that by saying Joe 6Pack with his $3000 ROTH Ira is not exactly "Wall Street" but it works well to speak of it when we use broad generalizations such as "60% of Americans are dependent on the stock market".  Keep in mind the data excludes defined benefit plans, which once more is now mostly focused in the public sector, so this survey gives us a good idea of the troubles in the private...
  • The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday.   The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.
  • Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009.
  • Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey.

Now aside from those ugly numbers, is the "hand in sand" approach combined with the lack of financial education I cited above.  About half of Americans have not even bothered to try to guess what they actually need to retire.  I suppose it's the "it will all work out in the end" theory.
  • But even as fears over health care costs and job prospects mount, the survey found that only 46% of workers have tried to calculate what they need for a comfortable standard of living in their golden years.
  • "People just don't want to think about this," said VanDerhei. "Everybody thinks they're too young to think about it, until suddenly they're too old to do anything about it."

Note: Survey respondants were 25 and older, and yes of course those in the 25-30 year range won't have much saved for retirement, but let's not use that as a way to excuse away the reality.


Meanwhile for that proportion of the income strata where indeed Wall Street DOES equal Main Street, things are looking much brighter.   Many in this group of course have their wealth affected much more by asset values rather than income, so the 2009 rebound in market's surely helped.
  • America's millionaires are on the rise again, according to a report issued Tuesday, after their ranks thinned out during the 2008 market meltdown.  U.S. households worth $1 million or more grew to 7.8 million in 2009, up 16% from 2008,
  • The firm's report also found that the number of ultra high-net-worth households, worth $5 million or more, jumped 17% to 980,000.
  • "This is largely attributed to the stock market rebound, since other assets including real estate and private businesses have not rebounded as dramatically," said George H. Walper, Jr., president of Spectrem Group.
  • The market drop sent the number of millionaires plummeting 27% in 2008, according to Spectrem. Even now, the number of millionaires is still well below an all-time high of 9.2 million in 2007.
  • .....the influential millionaires group controls about 70% of total U.S. assets

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