Nobody said planning for your financial future in a sustainable economy was supposed to be easy. This is the first of a three part series that is intended to address three of the major obstacles middle-class Americans face. Daunting as the challenges may be, there ARE realistic ways we can address each of these.
This first segment addresses the very survival of the middle class, and more generally the systemic inequality that pervades our economy. The prescriptions here are mostly in the realm of public policy, but I’ll also suggest some things that you can do personally to keep yourself in the game.
My second installment dives deeper into personal financial planning. Expectations of long-term market growth have shrunk substantially from what we had come to expect in the last decades of the 20th century. My answer here is built around a hypothetical financial plan. Yet I believe that, with some diligence there is still a realistic possibility of a middle class family saving for a comfortable retirement at a reasonable age.
Finally, I’ll tie this to sustainability. The fact is the challenges faced by the middle class and issues of sustainability go hand in glove. We can’t possibly solve our long term economic woes, or live comfortably ourselves, without learning to live and invest sustainably.
OK – I’ve pretty much promised to solve all the world’s problems. Let’s get started!
Chapter 1: Saving the Middle Class
Financial planning for the One Percent is an easy proposition – Only fools in this class, (and there are plenty) run out of money. My practice is not focused on serving “high net worth” clients. It’s about helping those who are supposedly the beneficiaries of all that the most advanced economy in the world has to offer. That is, the middle class.
Realistically, I believe that today there are two middle-class America’s. First, there is the traditional “blue-collar” middle class whose incomes are at or slightly below median income levels, and for whom living paycheck to paycheck has become then norm, even when they handle their money wisely. Then there is an upper-middle class that is well educated, and has mostly prospered as a result. Yet they live in an economy that does not guarantee them a sufficient income at retirement, nor does it protect them from the extraordinary burdens that health care, their desire to send their kids to college, and other personal and economy upheavals that frequently occur. In short, while they often live quite well, they also need to spend carefully, save diligently and make a myriad of other good decisions in order to ensure their own financial well being. Hey, what do you think we are? Socialists?
If you’ve followed my blog at all, you’ve heard me rant about income inequality. You’ve seen me cite economist Thomas Piketty, whose work shows how almost inevitably it is that the owners of capital, rather than wage earners, who will continue to amass an ever-greater share of our collective wealth. And if you haven’t followed me, you’ve certainly heard Bernie Sanders say loudly, clearly, and quite correctly that the concentration of wealth among a tiny group of Americans has accounted for virtually all of the nation’s economic growth in the past two decades. “We” aren’t prospering; “They” are.
I believe that income inequality is indeed a key problem in our society, but not that it is beyond resolution. I recently saw a report that summarizes the necessary actions to address inequality in what I think is an excellent fashion. I get all sorts of blasts from the financial press, and my introduction to this report came under the appealing title “High Earners are Going to Hate These Retirement Proposals.”
The report comes from a group called the Bipartisan Policy Commission. Chaired by former Republican Senator Kent Conrad of North Dakota, this is hardly the “kill the rich” crowd. You may want to take a closer look, but here are some of their specific suggestions for leveling the playing field:
- Limit favorable IRA tax treatment to accounts of $10 million or less. You may remember that Mitt Romney managed to amass a $100 million IRA. His retirement is, shall we say, secure enough. Personally, I’d cut off this tax advantage at about $2 million per household– that being plenty to ensure a very comfortable lifestyle for a couple living to a ripe old age.
- Limit Social Security spousal benefits to a lower level for the top 25% of its beneficiaries (but retain spousal benefits as is for everyone else).
- Limit one’s ability to “stretch” IRA’s for non-spousal beneficiaries to no more than 5 years.
I would add a few other suggestions and with these you would have a much fairer individual tax system than we have today:
- Keep the Estate Tax in place, and limit the exemption for a couple to $2.5 million.
- Eliminate the “step up in basis” provision that allows appreciated stock to be inherited without tax consequence.
- Eliminate the mortgage deductions for second homes.
- Ensure that every American family with income above the median pays at least some income tax.
Beyond taxation, I would add making public higher education free or nearly so for the middle class, and somehow continuing to find a way to make affordable health care available to all as the necessary public policy prescriptions to preserve America’s middle class.
If you haven’t found something yet that pisses you off, well I guess I’m not trying hard enough. The point is that many provisions of the tax code only make inequality worse, and it doesn’t have to be this way.
I said at the outset that I’d also suggest some things that middle class Americans must do themselves to preserve and improve their own well being. Very simply, the prescriptions here involve spending and saving. My experience is that most of my clients with more modest incomes get this – they don’t spend extravagantly, and there debts are modest. I see more spending problems among in the upper middle class. Too many Americans who indeed are in a position to prosper are the victims of what I’ll call predatory marketing. That is, they become addicted to consumption and believe themselves entitled to an upper class lifestyle that they simply don’t need and can’t afford. “Affluenza” is an apt title for this affliction. The prescription, of course, is to spend less than you make. Easier said than done, perhaps, but we’ll return to this challenge in the next installment of this blog.