July/August 2012 The Hole in the Bucket

Americans obsessed over personal finance during the last forty years as never before. So how come so many of us wound up broke? Here's the little-known story.

By Phillip Longman

And along with the payday lenders came new, more vicious species of loan sharks: subprime credit card issuers, auto title lenders, private student loan companies charging up to 20 percent APR, check-cashing outlets, and subprime mortgage brokers and lenders. Just the hidden fees—what Devin Fergus of Hunter College-CUNY calls the “trick and trap fees”—on student loans, mortgages, and credit cards sucked billions of dollars a year off the balance sheets of American families.

Meanwhile, of course, expanding mortgage credit, combined with continued generous tax subsidies for those who borrowed to buy a home, drove up home prices beyond all reason, while causing millions of Americans to overinvest in real estate as the bubble grew. And then, catastrophe.

It was a perfect storm. One that today leaves 69 percent of Americans saying it’s harder for them to achieve the American Dream than it was for their parents, and a full 73 percent saying it will be harder yet for their children and grandchildren. One that, according to a slew of new studies, now makes it harder to climb the socioeconomic ladder in the U.S. than in many parts of supposedly class-bound Europe. One in which about a third of all children born into the middle class in the 1960s and ’70s have fallen out of it. One that has seen the net wealth of Latino households fall by 52 percent between 2007 and 2009, and that of African American households by 30 percent. One in which the typical American family is now so deeply in debt and bereft of assets that they could only survive a month or two without a paycheck or some form of government assistance.
What are we going to do about it?

It’s tempting to ask why we can’t just go back to the “golden era” before the 1970s. And when it comes to the regulation of financial institutions, we should, indeed, do that.

But if you have any idea how to restore us to another era of long-term, salaried employment with traditional pensions and health care benefits, please write a letter to the editor of this magazine, now. And don’t forget to explain how these pensions and employer-based benefits would serve the interests of those of us who must jump from job to job, who are trying to start a new business or work part-time as we raise families or care for an aging relative.

Certainly there are things we could do that would help to get wages moving up again and make jobs more secure at least for a while. We could close the door to immigrants, if you want to go there. We could impose high tariffs on imports. We could make it easier for workers to unionize. And, to be sure, we could find ways to “bend the cost curve” on health care, to make higher education more cost-effective, and maybe even, with enough R&D, come up with huge supplies of cheap, green energy. We could also put taxes on high-income Americans back to where they were during the Clinton administration. We could even raise the income tax rate on the top 1 percent to 100 percent—which would raise enough money to pay for Medicare for roughly three years.

But in the end, none of that helps much if Americans still can’t avoid predatory debt and save securely for life’s predictable expenses and necessary investments. Americans need to be able to finance periods of unemployment or retraining. And above all they need to finance that prolonged period most of us will experience when we become too worn out and frail to find or hold down a job in the economy of the twenty-first century. We have come through a long era in which “prosperity” was financed, in effect, by depleting the net wealth of the average American. Getting back to real prosperity requires not just more jobs, but also fundamental reforms that will help more Americans hold on to more of their income and rebuild their wealth.

[Return to The Future of Success in America]

Phillip Longman is a senior editor at the Washington Monthly and a lecturer at Johns Hopkins University, where he teaches health care policy. He is also a senior fellow at the New America Foundation, where Atul Gawande is a board member.


  • Darsan54 on July 11, 2012 12:28 PM:

    I walk away with the feeling it's all hopeless.

  • DAFlinchum on July 11, 2012 1:50 PM:

    When 401(k)'s first came out I thought that they were a Trojan Horse that would lull workers into thinking that it would be an addition to their defined benefit pension plans and at the same time signal to employers/companies that 401(k)'s would be a fine substitute for defined benefit pension plans. As it happens I was correct.

    First a few companies, then more, and more still as the companies that tried to do best by their employees discovered that it was hard to compete with those companies that went defined contribution. The employees who had been happy to have their companies do a small amount of matching funds soon found that this would be their company's only contribution in the future. Long term employees saw their defined benefit pensions frozen; new employees got 401(k) only.

    I now predict that the same thing will happen with the ACA and company provided health care. First the employee portions of fees, copays, premiums, etc will start rising until the employees' costs are nearly as much as if they went to the exchanges. Next, companies start off-loading employees to the exchanges and paying the cheaper penalty. The employees see little difference as their costs have risen so much and the federal government will shoulder more and more costs as it subsidizes families on the exchanges. Where will this money come from? Higher taxes on 'the rich'? Don't bet the farm.

    It is going to prove to be a boon to the biz interests from insurance companies on down as companies shift the costs of doing business, which used to be health care benefits for employees, onto the government and community at large and pocket the extra profits.

    The ACA will not be so 'affordable' and will instead be the law of unintended consequences.

  • Daniel on July 11, 2012 9:55 PM:

    What starts with an F, ends with a K, and means get screwed?

  • BenefitJack on July 12, 2012 6:02 PM:

    The author states: "Most Americans approaching retirement age do not have a 401(k) or other retirement account. Among the minority who do, the median balance in 2009 was just $69,127."

    Two issues with how that is positioned in the article:

    First, he is absolutely correct that the LACK OF a retirement savings plan is one of the main reasons why workers will not be prepared for retirement. The four top reasons are:
    (1) Most individuals do not have access to a plan at work,
    (2) Most individuals who do have access to a plan at work fail to enroll when first eligible,
    (3) When individuals get around to enrolling to save for retirement, they typically don't contribute enough; many fail to contribute enough to get the entire company matching contribution, and finally,
    (4) The typical American changes employers 5, 6, 7 times in a working career, and too frequently, she takes a distribution of any such savings and uses them to pay accumulated debts (or to splurge).

    Second, the $69,127 number is misleading positioned as it is here too close to the statement "as they approach retirement age". One Employee Benefits Research Institute study of millions of participants confirms that the average account balance in 401(k) plans as of December 31, 2010 was ~$60,000, however, workers who had 30 years service with the same employer and are over age 60 had an average account balance of ~$202,000.

    The implicit suggestion that many workers or even a majority of workers once had access to a well-funded, non-contributory, final average pay, defined benefit pension plan, perhaps with an automatic post retirement COLA is just fantasy.

    In terms of a precursor for how employers will respond to health reform, look no further than what has happened to employer-sponsored coverage over the last ten years, or, what happened to retiree health care coverage over the past 30 years.

  • Rugosa on July 12, 2012 7:00 PM:

    woa - you got me at had all Americans been required to save for retirement Did you not read what you wrote a few paragraphs up: By the end of the 1970s, the wages of most young people paying into the system were stagnating.

    How can you require us to save for retirement when our incomes increasingly can't keep up with the cost of living?

  • Lex on July 13, 2012 9:47 AM:

    Interesting, though, isn't it, how just about all Fortune 500 CEOs have defined-benefit pension plans AS WELL AS other retirement savings. Not to mention golden parachutes: The guy who was pushed out as CEO of Duke Energy a few days ago after serving in the position all of about 20 minutes (literally) gets an exit package valued at north of $40 million, financed, in all likelihood, by stockholders, ratepayers or both. That's just farking nuts and ought to be illegal.

  • Bill Bush on July 13, 2012 3:58 PM:

    Submit to your Galtian Overlords! Die immediately after retirement, leaving your entire estate to pay off the federal deficit! Kill the wounded! Cull the hospitals with a cost analysis tool favoring soonest future profitability!

    Or abandon the dog-eat-dog mentality and the current vicious variant of capitalism. Try doing things humanely, responsibly and kindly. Unless you think the first paragraph sounds like fun.

  • leo from chicago on July 13, 2012 5:47 PM:

    "How can you require us to save for retirement when our incomes increasingly can't keep up with the cost of living?"

    Exactly. I love how they tell you you can save up to such and such a percentage (tax free!) in 401k accounts and IRA's -- when you're living paycheck-to-paycheck.

  • brian t. raven on July 15, 2012 4:05 PM:

    1. We could close the door to immigrants,
    2. We could impose high tariffs on imports.
    3. We could make it easier for workers to unionize.
    4. We could even raise the income tax rate on the top 1 percent to 100 percent.

    It's a very good and informative article except for the four recommendations above. From the perspective of basic economics these are fundamentally flawed. The Monthly needs to send these kinds of articles to a venerable economist before publishing. Even if the recommendations were merely musings they still should have been excised; because they diminish the argument by undermining author credibility.

  • skeptonomist on July 20, 2012 8:03 PM:

    Generally good piece explaining the role of the finance industry in shrinking the assets of the 99%. The housing bubble was directly responsible for most of the loss since 2002, and it probably would not have been possible without credit-default swaps, which gave a false sense of security to all the bad mortgage debt. There is little sign that the dangers of derivatives have been restrained.