Family Finances

To lift American families, we need to help them earn AND save

July 26, 2016  • Andrew Yarrow

Amid all the talk of inequality and economic insecurity, the discussion on the left has been strangely divided. One side says: Raise wages so millions of hard-working Americans can pay their bills. From the other camp: Build savings, especially for retirement, so seniors don’t go broke or depend almost entirely on Social Security.

The connection between wages and income vs. wealth-building and retirement security is obvious. You need decent wages for even a small nest egg, and wages must not only meet present needs but be enough to allow for savings. More than two-fifths of workers are paid less than $15 per hour; a similar proportion of Americans lack sufficient assets to subsist at the poverty level for three months without income; and less than half of 55- to 64-year-olds have more than $25,000 in retirement savings.

However, the savings and asset-building crowd hangs out in different quarters from the wages and incomes gang. They should be on the same team but too often are at opposite ends of the field. A big part of the disconnect stems from differing political and philosophical connotations, as well as institutional associations linked to each issue.

Raising wages and providing benefits like paid sick leave are the bread and butter of those on the leading edge of progressive activism. But saving, asset-building, and retirement security carry a whiff of the financial industry and often stray into the realm of values like “personal responsibility,” both of which are anathema to many progressives.

Too narrow a focus on wages and work verges on a sort of short-term thinking akin to many corporations’ focus on maximizing quarterly earnings. Wages need to be seen as one component of income, which can be increased through policies like expanding the earned income tax credit, other tax credits, benefits like food stamps, and bolder ideas like wage insurance or a guaranteed minimum income.

Income needs to be seen as a building block of wealth – or, at least, economic security.

Although the popular furor is largely about raising wages and addressing income inequality, building wealth and reducing wealth inequality are at least as important and arguably the more radical discussion. While the top 1 percent of the income distribution get about 24 percent of the nation’s income and the bottom 40 percent together receive less than 5 percent, the wealthiest 1 percent of the population control more than 40 percent of the nation’s total net worth, whereas the poorest 40 percent account for 0.3 percent.

Increasing wages would help workers and their families enormously in their day-to-day lives and could prevent many from falling into debt. But it is farcical to think that substantial assets can be accumulated on a $12- or $15-per-hour wage. Moreover, in an economy in which workers slide in and out of jobs, hold unstable contract or part-time jobs, and experience increasing income volatility, being able to save for a “rainy day,” as well as for a strong safety net, is critical.

Of course, savings aren’t just important for the ups and downs of life – or big expenses like a home or college tuition. Being able to live comfortably in retirement, confront the threat of devastating medical bills, and even bequeath a legacy to one’s children are ever more important as people live longer.

One investment-research firm calculated that a couple needs to save $1.2 million to generate income of $40,000 per year over a 30-year retirement. Yet the country that is routinely referred to as the “world’s wealthiest” actually ranks behind 18 other nations in terms of its typical citizens’ wealth.

Saving and retirement security have been battered in recent decades by the combination of low, flat, or declining wages and the shift from employer-funded defined-benefit pensions to defined-contribution plans like 401(k)s and IRAs – which only about half of workers even have.

Savings rates have ticked up since the Great Recession, but most Americans lack the income, the inclination, or the incentives to save. The sturdy old savings account or government bond of yore is of little use in a near-zero interest-rate environment. It’s all well and good to talk about “personal responsibility,” but personal responsibility, a $25,000 annual income, and no pension will leave tens of millions of Americans working until they drop – or in need of more Social Security, with its consequent drain on public finances.

Many things could help: a requirement that employers provide pension plans and automatically enroll workers; multiemployer plans for small businesses; children’s savings accounts and individual development accounts seeded by government; pensions that are portable from job to job; financial technologies that make it easier and cheaper for people to save; and – heaven forbid – Social Security reform.

The two camps need to talk and strategize about ways to achieve what should be a common goal. Both decent wages and building wealth are about ensuring economic security throughout Americans’ lifetimes.

A version of this piece appeared in the Philadelphia Inquirer.

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