Moving from Health to Wealthy
By James K. Glassman

Over the past couple of decades, the U.S. economy has been a raging success at boosting incomes and creating jobs. The average American now has 50 percent more purchasing power after taxes than in 1980, and unemployment, at 4.1 percent, is the lowest in 30 years. We’re still gaining an average of 200,000 net jobs a month—the equivalent of a new General Motors workforce every quarter.

But jobs and income alone don’t provide the foundation for stable, comfortable living. Families need wealth—a store of financial assets (stocks, bonds, and cash) that can be turned to in an emergency, drawn upon in retirement, or passed on to heirs.

Today, despite the boom times, much of the nation is suffering from a “wealth dearth.” Building wealth—especially among low- and moderate-income Americans—may be the most important economic challenge our nation faces.

How bad is the problem? A study released in October found that the median U.S. household has only $1,000 in net  financial assets (stocks, bonds, CDs, savings and checking accounts, IRA and Keogh funds—minus any debt secured by those assets). Just one measly thousand dollars!

That figure was derived from five-year-old Census data by researcher Joseph M. Anderson. His breakdown showed that the bottom two-fifths of U.S. households had no financial wealth at all. The third fifth had median assets of just $1,199. Even the fourth fifth had only $9,850 in median net assets, while the top group had $73,000.

Much of this uneven distribution comes from age. In a separate study, Anderson found that families headed by a person aged 25 to 34 had a median wealth of zero, while the median for families headed by someone 55 to 64       was $4,800. But even $4,800 isn’t much.

More troubling was Anderson’s discovery that a decent income did not indicate a decent investment portfolio. Families with incomes between $50,000 and $75,000 had net financial assets of just $8,000.

What’s going on here? Well, investing starts with saving, and Americans are consuming nearly every dollar they earn. Recently, the Commerce Department revised the way it calculates the personal savings rate, but the new higher figure is still only 2.5 percent.

One reason families don’t save is that they don’t appreciate the value of investing. In the October study, respondents were asked, What is “your best chance to obtain half a million dollars or more in your lifetime?” Some 41 percent of those with incomes from $25,000 to $35,000 said, “Win a lottery or sweepstakes,” while only 33 percent said, “Save or invest a portion of your income.”

If you invest just $25 a week in an investment that returns 9 percent annually (stocks have returned 11 percent, on average, over the past 70 years), you will accumulate $514,000 in 40 years. Better financial education along these lines is needed.

The good news is, many Americans are beginning to understand the power of investment—which is why nearly 20 million families became shareholders for the first time between 1996 and 1999, and why 48 percent of Americans now own stocks or mutual funds.

This recent surge in stock buying will show up in improved wealth statistics when more up-to-date figures come out. Nevertheless, very little wealth has yet been accumulated in the bottom half of American households. This is a serious problem for which poor public policy should take much of the blame.

Why should we, for instance, have tax breaks for homebuying, but not for saving and investing? The best—indeed only—chance that most Americans have for a decent retirement will come from investing in stocks. Let’s help them. A good way to start is by allowing them to move a few percentage points of the Social Security taxes they pay (the program’s retirement portion alone takes 10 percent of every worker’s pay right now) into a personally owned account.

Or consider President Clinton’s proposed Universal Savings Accounts (USAs)—a simple, quick method to let 124 million Americans start building wealth. USAs amount to a levy on higher-earners that is used to open investment accounts for lower-earners—one of the better uses for tax dollars. (See TAE May/June 1999, pp. 76-77.)

As more Americans acquire wealth, especially through stock ownership, they’ll create a powerful “investor class” that could steer politicians toward policies that promote lower taxes, freer trade, and less onerous regulation. Citizens will align their interests more and more with the policies that create the nation’s prosperity.

Richard Nadler recently observed in a Cato Institute paper that “The most significant demographic shift of this century is the rise of history’s first mass class of worker capitalists—men and women whose wealth-seeking activities include both wage earning and capital ownership.”

But right now, too many Americans have missed out on this revolution, and have little or no wealth at all. In the campaign ahead, smart politicians should help them acquire it.