This post was originally published by the Biden Forum.
The economy has been growing steadily for decades, but the rising tide is lifting some boats more than others. Our country as a whole is doing well — we’re wealthier now than we’ve ever been — but it’s mainly people at the top who are benefiting. Wealth and prosperity are not trickling down to middle- and low-income families. But this isn’t inevitable. We can make wealth building more equitable.
Wealth inequality is greater than income inequality, and wealth inequality has worsened over the past 50 years. In 1963, high-wealth families — those whose wealth ranked at the 90th percentile — had $6 for every $1 in wealth owned by the typical middle-class family. By 2016, they had $12.
In 1963, a family with $238,860 had more wealth than 90 percent of Americans, and about six times the $41,028 in wealth owned by the typical (or median) American family (all in 2016 dollars). This gap mostly stayed the same through 1983; everyone was gaining wealth at roughly the same rates. But this all changed between 1983 and 2016, when the top pulled away. By 2016, a family at the 90th percentile had almost $1.2 million in wealth, more than 12 times the $97,300 owned by the typical family.
Think about what this inequity means for you, your children, and your grandchildren — the difference it makes over the course of your life. It means less money to pay for an emergency, to help your child with a down payment on a home, or to pay some of your grandchild’s college tuition. Wealth is not just for the wealthy.
Wealth inequality matters for everyone, not just those at the bottom. A strong and thriving middle class is a key ingredient for economic growth. Inequality can weaken the economy, increase crime, result in a less educated population, and mean more people needing help from the safety net.
Why hasn’t wealth inequality improved over the past 50 years? Structural racism, upside-down federal wealth-building subsidies, gaps in health insurance, and increasing student loan debt all play a role. Here are five policies that can help:
1. Start wealth building early in life with baby bonds, child development accounts, or child savings accounts.
The vision is that every child receives a subsidized account at birth with an initial government deposit. The idea is to provide a foundation for family financial literacy, bring all families into the mainstream financial sector, and provide tangible resources that could be invested in each child’s future. Some proposals restrict use of this money to investments in education, homes, or small businesses. A major benefit to this approach is building assets to pay for college, as student loan debt is a problem for many Americans. In recent years, 13 percent of student loan holders have debt in collections, exceeding 50 percent in some counties.
2. Help families build up emergency savings.
Half of Americans don’t have $2,000 in nonretirement savings, undermining their financial stability. Even small amounts of savings can help. Families with a savings cushion as little as $250 to $749 are less likely to receive public benefits, be evicted, or miss a housing or utility payment after a job loss, health issue, or large income drop. Strong evidence from research, including that on savings programs, topples the common misconception that people with low incomes cannot save. One solution might be to create incentives to save for emergencies, proposals like an earned income tax credit saver’s bonus where every $1 saved gets a 50 cent match. Emergency savings could have additional benefits by helping families avoid borrowing from payday or auto title lenders and falling into a vicious cycle of debt.
3. Promote retirement savings through a refundable savers’ credit and automatic individual retirement accounts (IRAs).
One of the major challenges with retirement saving is that low-income workers often get little or no tax benefit for saving. These “upside-down” retirement tax subsidies could be corrected with a refundable saver’s credit. A second problem is that nearly half of US workers do not have access to or participate in a workplace retirement saving plan, such as a 401(k), which makes it easier to save. Under automatic IRAs, employers who do not provide retirement accounts would automatically deposit part of the employee’s paycheck into an IRA. New Yorkand Oregon are leading the way with automated retirement savings plans. The terminated federal myRA program could bring similar benefits if it were brought back and eligible workers were automatically enrolled. Without policy reforms, the changing nature of work will exacerbate wealth inequality because of the decoupling of employment and benefits for retirement and health.
4. Reform homeownership subsidies.
Homeownership is the key avenue for wealth building for most Americans, but upside-down tax subsidies for homeownership stack the deck in favor of high-income taxpayers. After the 2017 tax legislation, for instance, the home mortgage interest deduction will benefit only homeowners with the highest incomes and most expensive homes. The subsidy is poorly designed, encouraging debt, not equity. A first-time homebuyers’ tax credit would more equally benefit all Americans and more effectively promote homeownership. The power of homeownership as a wealth-building tool comes not from price appreciation but from automatic, monthly mortgage payments and the incentive to make capital improvements on your home.
5. Provide universal health insurance.
Medicare for All or a less ambitious but still promising approach that would provide near universal coverage can support a strong middle class. What does health insurance have to do with wealth building? Past-due medical debt can be a significant barrier to financial health and affects millions of Americans’ ability to build wealth. Today’s younger generations, America’s future middle class, are more likely to have past-due medical debt than baby boomers or the silent generation. This is a surprise until you consider that Americans older than 65 have universal health insurance through Medicare.
Having more inclusive wealth-building policies will promote saving opportunities for all Americans, regardless of age, race, or ethnicity. Wealth is not just money in the bank; it’s insurance against tough times, tuition to get a better education and a better job, capital to build a small business, savings for retirement, and a springboard into the middle class. Wealth translates into opportunity.