The middle class is in terrible shape. Wages are stagnant, the middle class’s share of the nation’s wealth has been declining for decades, and ordinary Americans feel like they’re just exiting a recession that ended years ago. But could 2015 be the year that marks a turning point for rebuilding middle-class wealth? Two new retirement savings initiatives, myRA and Illinois’s Secure Choice, offer hope that financial security and wealth building aren’t relics of the past for the middle class.
One reason the wealth gap between middle-income and high-income earners is so stark is because of a lack of diversity of assets held by middle-income families. Middle-income wealth is locked up in the value of the home. Almost three-quarters of the wealth of middle-income families is held in a primary residence, compared to only 9 percent of the wealth of the highest 1 percent of income earners.
One reason the wealth gap between middle-income and high-income earners is so stark is because of a lack of diversity of assets held by middle-income families.
Families with higher incomes have more diversified balance sheets, allowing them to take full advantage of the growth, stability, and tax advantages offered by different asset types. During the past few years, the value of financial assets like stocks and mutual funds has risen much faster than housing prices, overwhelmingly benefitting higher-income households: The wealthiest 10 percent of Americans own 81 percent of all stock held directly, in mutual funds, or in retirement accounts.
That last one – retirement accounts – may come as a shock. 401(k)s are often thought to be a significant source of family wealth for the middle class. But only about 50 percent of families making around median income (in the 40th to the 60th percentile) even have a retirement account, and the median value of the assets in the accounts among those who have them is just $25,000. If you include the millions of Americans who don’t have a retirement account, the typical working-age household in the U.S. has just $3,000 saved for retirement.
In order to rebuild middle-class wealth, we need to make it easier to build assets in forms other than housing. Retirement assets are a good place to start, but doing so requires paying attention to the financial challenges that ordinary Americans face. Americans recognize that retirement savings are important, but 44 percent of households don’t have the kind of emergency savings cushion that financial advisors recommend as a first step. Is it realistic to ask these families to lock money away for 30 years when their personal safety nets are so weak?
It finally could be. Here’s why 2015 could mark the first steps on a new path toward greater, more diversified and more flexible asset accumulation for the middle class.
In his 2014 State of the Union, President Obama announced the creation of myRA, or “my Retirement Account,” an opportunity for employers that do not offer retirement plans to connect their employees to a “starter” retirement account. MyRAs are essentially Roth IRAs invested in Treasury bonds, offering a safe, low-yield investment option. Once account balances reach $15,000, participants would roll the funds over into a Roth IRA offered on the private market. The concept is simple, but it could have a big impact. The reason? Roth IRAs allow workers to access their contributions at any time to weather unexpected expenses without taking out expensive debt or paying the taxes and penalties that make 401(k) withdrawals so painful. Think of it as an easy way to diversify assets through time: saving for the short- and the long-term simultaneously.
In order to rebuild middle-class wealth, we need to make it easier to build assets in forms other than housing.
The other program that could improve middle-class wealth in 2015 is the Secure Choice Retirement Savings Program, which was signed by outgoing Illinois Governor Pat Quinn this week. Secure Choice would require employers with more than 25 employees to automatically enroll their employees in the Secure Choice plan. Employees could opt out at any time, but would be defaulted into saving 3 percent of their pay into a low-fee retirement account. Like the myRA, the funds would be invested in a Roth IRA structure so that employees would have access to the funds – penalty-free – if they need them for emergency expenses.
Secure Choice and myRA are promising because they are built on key principles that have been shown to promote sustainable, lifelong asset building. First, easy access is critical to promoting savings. Automatic enrollment, as in Secure Choice, has been shown to yield the highest participation rates, opening the door to retirement savings for as many as 2.5 million workers in Illinois. With myRA, although enrollment is not automatic, accounts could eventually be made available to all workers with earned income through online enrollment or by opening an account on the tax form. The second principle the programs share is that they allow for a diversity of uses. That’s critical, because families have myriad savings needs. For instance, saving for a retirement 20, 30, or 40 years in the future is not always appealing or possible for low- and middle-income families. Statistics bear that out: over 25 percent of households that use a 401(k) have withdrawn money from it to meet non-retirement needs – and paid penalties in process. The Roth structure of both myRA and Secure Choice creates useable wealth in the near term while encouraging the pursuit of long-term goals. That’s a structure that will help many more families than the 401(k) model.
MyRA and Secure Choice won’t bring ordinary Americans much closer to the top 1 percent. But together they’re putting in place new models to help build up the wealth of the American middle class. 2015, you’re off to a pretty good start.