In The Atlantic’s May issue, Neal Gabler explores his own financial troubles for clues as to why so many Americans are struggling to remain financially solvent. We reached out to some of the leading scholars of the American middle class to ask what they make of Gabler’s analysis, and their responses are compiled here. (We also have a popular ongoing series of readers telling their own stories of financial woe.)
The debate around our cover story and middle-class money continues. Damon Jones, a professor the at University of Chicago Harris School of Public Policy, adds that saving for retirement is a different process than in generations past:
One of the most important financial decisions we face is saving for retirement. Over the last three decades, there has been a massive shift in how private-sector workers save for the future. Today, more workers than ever before are relying on retirement plans that depend on their personal investment choices and stock-market performance, as opposed to plans that have a guaranteed pay out built in.
In 1980, 62 percent of workers with retirement plans had only a defined benefit plan. These are the traditional pensions of our grandparents’ era: they promise a stream of income at retirement, based on a worker’s earnings and years of service with an employer. Meanwhile, only 7 percent of workers relied solely on a defined contribution plan. A defined contribution plan, such as a 401(k), pays out based on how much the worker and employer each contribute, as well as how the investment fares on the stock market. By 2011, these numbers had essentially reversed: 69 percent of workers enrolled in a defined contribution plan, and only 7 percent in a defined benefit plan.
While both plans involve risk, defined contribution plans arguably shift more risk onto employees. Defined benefit plans are insured by the federal government and are typically paid out in an annuity, guaranteeing a fixed payment over the rest of one’s life. In contrast, defined contribution plans are more susceptible to the throes of financial market swings and are more easily cashed out in a lump sum at retirement, leaving workers exposed to the risk of outliving their wealth. And while defined contribution plans provide personal control, this presents more opportunities for investors to miss out—many plans require active enrollment and active transferring of funds when changing employers. While retirement plans do not tell the whole story, they play a role in determining American’s financial security.
Note: Defined benefit and defined contribution participation rates from the Employment Benefit Research Institutes tabulations of US Department of Labor statistics.
In reaction to Neal Gabler’s cover story, Vicki Bogan, an associate professor at Cornell and the director of the Institute for Behavioral and Household Finance, points to a big problem for American families: financing their daily lives with debt. She goes into great detail:
The Great Recession had an enormous impact on U.S. household finances. The financial crisis caused large drops in income [see the figure above] and substantial erosion of household wealth due to the larges simultaneous declines in the values of housing and equities. However, the financial insecurity epidemic that is becoming increasingly highlighted in the media is a problem that has been brewing for decades.
While there are multiple factors that contributed to the widespread problem, one of the biggest issues is the too frequent household behavior of financing day-to-day and other consumption with debt. For two decades prior to the Great Recession, U.S. households were steadily amassing significant amounts of debt. Around 1986, households started accumulating debt and eroding their liquid asset holdings. By 2007, households were increasing debt at a rate equivalent to 6 percent of aggregate consumption every year.
This detrimental trend continues and contributes to the tenuous financial position of households.
Any single debt decision is probably insufficient to destroy a family’s financial situation. However, when families fail to manage debt from a holistic perspective and do not quantify and understand all sources of household debt, they tend to take on debt in a manner that eventually snowballs into financial insecurity. There is often a focus on credit-card debt because the interest rates are very high relative to other types of debt. Also, credit-card debt can be more salient for families since having too much of it can preclude further borrowing.
Yet, credit-card debt is not the only critical component of household debt. There are other significant sources of debt that can lead a household down a path to financial insecurity. First mortgages, in contrast to home-equity loans (2nd mortgages), have several benefits over other types of debt. First-mortgage interest payments are tax deductible. First mortgages give households the option of refinancing, if overall mortgage interest rates decline and financing conditions become more favorable. First mortgages also allow home buyers to build equity.
Despite the relative benefits of first mortgages, the decision to buy a home with debt should be considered carefully. In most cases, one should consider buying a home only when planning to stay in it for several years. As a general rule, households should not take a mortgage in which they cannot afford the monthly payment. Problems arise when the cost of the home (including taxes, maintenance, and other costs) exceeds 28 percent of monthly income.
Failing to understand the risks associated with adjustable-rate mortgages (ARMs) can also cause problems. With ARMs, there is a risk that overall interest rates will increase and correspondingly, the household’s monthly mortgage payment. Furthermore, when moving from one home to another it is not advisable for a person to put his/herself in a position in which (s)he must carry two mortgages. Most households cannot afford to have two homes (even for a short period of time).
This was one of the issues that contributed to Gabler’s financial insecurity. Home-equity loans do not have the same benefits as first mortgages. While the homeowner is still using the home as collateral for the loan, (s)he is not building equity. Furthermore, interest rates for home equity loans are generally significantly higher than for first mortgages and the interest payments on home-equity loans are not tax deductible.
One big (underemphasized) debt mistake that households often make is borrowing against a retirement account. This can be problematic because there are significant costs and risks associated with this.
Moreover, it is important to start saving early for retirement and this critically undermines that objective. In the article, Gabler mentions borrowing from a 401(k) to finance his daughter’s wedding. While the sentiment to give one’s daughter a great wedding is laudable, this is not necessarily the best financial decision. The best gift to give one’s daughter would be parents that are financially secure in old age and are not a financial burden to her or her family. Borrowing from a 401(k) account should be a last resort option for emergencies only.
Earlier in the week Damon Jones responded to our May cover story with a discussion of retirement plans. Today, John Beshears, a professor of behavioral economics at Harvard, adds to that theme with an anecdote about his mother:
My mom retired as a high-school teacher in the San Francisco public-school system about two years ago. Based on her 34 years of service (many of those years part-time), she now receives a check every month from the teachers’ retirement fund. It’s a modest amount, about half what she used to receive when she was working, but it is very comforting to know that the check will continue to arrive, month after month, for the rest of her life. My mother is lucky to have worked for an employer that provides such a lifetime income guarantee, more formally known as a defined-benefit pension plan (DB plan). Most Americans are not as lucky.
In the 1960s and 1970s, many major U.S. employers provided DB plans to their employees. According to the Department of Labor, private companies ran more than 100,000 such plans in 1975, with more than 27 million workers actively participating. Over the past four decades, however, companies have killed off these plans—as of 2013, only 44,000 remain, with 15 million active participants. A confluence of factors led to the death of the pension. Companies started to find DB plans too expensive and too risky to maintain. They also found a cheaper alternative, the defined-contribution plan (DC plan).
In DC plans such as 401(k)s, it is the worker, not the employer, who is responsible for deciding how much money to save in the plan and how to invest that money. Employers still pitch in some funds to supplement workers’ own contributions, but there is no guarantee that the end result of saving and investing through the plan will produce a target level of retirement income. Unfortunately, with workers in the driver’s seat, the evidence indicates that many families have trouble building the financial foundations for a secure retirement. The Center for Retirement Research at Boston College has calculated that more than half of households are at risk of experiencing a significant drop in their standard of living when they reach retirement.
DB plans are not going to make a comeback. The new system of DC plans is inadequate in its current form, although it is steadily improving. Will it reach the point where most or even all households have a comfortable retirement? Maybe eventually, but sadly not in time for too many Americans.
Kristin Seefeldt, an assistant professor of social work at the University of Michigan, expands on our discussion over Neal Gabler’s piece on the shrinking of middle-class wealth:
The financial insecurity experienced by so many Americans is not just rooted in the proliferation of credit cards and other financial products now available but also in the changed nature of the employment contract. Let’s examine Mr. Gabler’s situation.
Twenty-five years ago he might have been a tenured faculty member at a university, and the income he derived from book advances and royalties would have been extra money he was paid over and above his salary or perhaps used to reduce his teaching load. But every year he would have been able to depend upon that salary to support his family and would not have faced lean or uncertain years in between books and other projects. Mr. Gabler mentions that he has had positions as a lecturer at various institutions, equivalent to a temporary position with limited if any access to benefits available to regular employees. The American Association of University Professors estimates that just over three-quarters of all teaching positions at universities are filled by such contingent workers, who may have to piece together jobs at multiple institutions and are guaranteed no job security.
This phenomenon occurs throughout the labor market. Just as a newly minted Ph.D. may find that only lecturer positions are available, the custodian at an elementary school may find her unionized job eliminated and replaced by contracted workers who are paid less and have very few workplace protections.
Usury laws were designed to protect vulnerable borrowers from exploitative lenders trying to profit from their distress. Once the caps were lifted, so was the shame of charging high interest on loans. Today, payday, subprime, and credit card lenders peddle predatory products under the cover of law.
Meanwhile, the stigma was placed on the borrowers. Financial gurus began to label borrowers of high cost loans as short-sighted or weak-willed even as many were forced to borrow to survive. Instead of placing the burden on lenders to offer humane terms, we shifted the burden to borrowers to avoid making any financial steps that might necessitate an emergency loan.
Typical of this borrower shaming was the public anger unleashed on underwater mortgage holders after the financial crisis. The press and media vented over their neighbors’ irresponsible house flipping while the lender banks who had displayed just as much stupidity and irresponsibility were spared the moralizing.
Credit is a double-edged sword. For most Americans, low-cost credit has been the only path to prosperity. On the flip side, high-cost debt can lead to financial ruin.
For the post-war generation, credit was a way to wealth. Thanks to several government programs, GIs took out low interest loans to buy homes and educations that, coupled with abundant job possibilities, provided financial security. Credit was the ladder of social mobility.
Today, high-interest credit coupled with wage stagnation is a chute covered in sharp and dangerous objects that leads to financial insecurity. Americans used to borrow to attain a better life. Today, they have to borrow just so they can hold on to what they have. Most Americans have a few-finger grip on the borders of an ever-shrinking middle class and credit, instead of lifting them over to financial health is pushing them off the ledge.
[To make matters worse,] most Americans who experience financial insecurity live in a network of other friends, neighbors or family members, which means they are unable to draw on financial support when they falter.
Research shows that financial education is not the answer to financial health. The difference between the financially insecure and the secure is not who knows more about money. We certainly can be saving more and spending less, but the problem is much bigger than that. It’s wage stagnation, systemic poverty, and high-priced credit.
The 47 percent of financially insecure Americans are not all bad decision-makers, though some surely are. Nor are wealthy Americans spendthrifts who are money-wise. At best, financial education is minimally useful. At worst, it tells a distorted story that those who suffer can decide to join the ranks of the well-off by making better decisions.
Michael Sherraden, the director of the Center for Social Development at Washington University in St. Louis, read our cover story and imagines what would happen if development accounts—ones that kids could draw on for major milestones—were established at birth and implemented as U.S. policy.
Enough monthly income is important, but owning assets is the key to family stability and development. Yet many Americans struggle to accumulate even modest assets. They live with no buffer against cuts in income and unexpected expenses.
For every baby born in the United States, an account is opened with funding from multiple public, nonprofit, and private sources. Over the years, family members contribute to the accounts. Earnings gradually accumulate, and the accounts grow in value over time. When the babies grow into young adulthood, they use the accumulated assets to help pay for their postsecondary education. Later, they use them to buy a home. When they’re older, they use them in retirement.
Such accounts already exist: Child Development Accounts (CDAs). At the Center for Social Development, we are engaged in a large-scale policy test of these accounts, a statewide experiment in Oklahoma. Results are positive. Our research is informing policy in U.S. cities and states, and other countries have adopted CDAs. Singapore, for instance, announced an expansion of CDAs in March, with the equivalent of US$2,200 deposited automatically into accounts of every newborn.
Universal, automatic, and progressive CDAs could become national policy in the United States. Over time these accounts would lead to more inclusive and less unequal asset accumulation. U.S. families—and the nation as a whole—would do better.
Feeling out of step with the mores of contemporary life, members of a conservative-Catholic group have built a thriving community in rural Kansas. Could their flight from mainstream society be a harbinger for the nation?
Half an hour down the highway from Topeka, Kansas, not far from the geographic center of the United States, sits the town of St. Marys. Like many towns in the region, it is small, quiet, and conservative. Unlike many towns in the region, it is growing. As waves of young people have abandoned the Great Plains in search of economic opportunity, St. Marys has managed to attract families from across the nation. The newcomers have made the radical choice to uproot their lives in pursuit of an ideological sanctuary, a place where they can raise their children according to values no longer common in mainstream America.
American conservatives who find themselves identifying with Putin’s regime refuse to see the country for what it actually is.
Sherwood Eddy was a prominent American missionary as well as that now rare thing, a Christian socialist. In the 1920s and ’30s, he made more than a dozen trips to the Soviet Union. He was not blind to the problems of the U.S.S.R., but he also found much to like. In place of squabbling, corrupt democratic politicians, he wrote in one of his books on the country, “Stalin rules … by his sagacity, his honesty, his rugged courage, his indomitable will and titanic energy.” Instead of the greed he found so pervasive in America, Russians seemed to him to be working for the joy of working.
Above all, though, he thought he had found in Russia something that his own individualistic society lacked: a “unified philosophy of life.” In Russia, he wrote, “all life is focused in a central purpose. It is directed to a single high end and energized by such powerful and glowing motivation that life seems to have supreme significance.”
The shared phone was a space of spontaneous connection for the entire household.
My tween will never know the sound of me calling her name from another room after the phone rings. She'll never sit on our kitchen floor, refrigerator humming in the background, twisting a cord around her finger while talking to her best friend. I'll get it, He's not here right now, and It's for you are all phrases that are on their way out of the modern domestic vernacular. According to the federal government, the majority of American homes now use cellphones exclusively. “We don't even have a landline anymore,” people began to say proudly as the new millennium progressed. But this came with a quieter, secondary loss—the loss of the shared social space of the family landline.
“The shared family phone served as an anchor for home,” says Luke Fernandez, a visiting computer-science professor at Weber State University and a co-author of Bored, Lonely, Angry, Stupid: Feelings About Technology, From the Telegraph to Twitter. “Home is where you could be reached, and where you needed to go to pick up your messages.” With smartphones, Fernandez says, “we have gained mobility and privacy. But the value of the home has been diminished, as has its capacity to guide and monitor family behavior and perhaps bind families more closely together.”
If the debate about structural racism is highly complicated, the moral truth about the anti-Semitic shooting is nevertheless straightforward.
Four people were murdered on Tuesday, and two assailants killed, in an anti-Semitic attack on a kosher market in Jersey City, New Jersey. It was one of the deadliest attacks against Jews on American soil in the history of the United States; if the perpetrators had succeeded in detonating a pipe bomb they had built, the carnage could have been even worse. And yet the shooting attracted remarkably little attention at first and even now barely seems to be penetrating the national conscience.
Perhaps that’s because, in the House of Representatives, the impeachment articles against President Donald Trump are nearing a vote. Or because William Barr, the attorney general, has launched a set of broadsides against the FBI. Or perhaps the relative silence about the Jersey City massacre is due to the fact that it does not fit a neat political narrative.
The fight against discrimination requires judgment—but many Jews don’t trust this administration to exercise it appropriately.
What are Jews? Members of a religious group? A race or an ethnicity? A nation? Some mixture of them all, or something else entirely?
As a debate among the Jews, this question may be academically interesting or, depending on your point of view, incredibly tedious. But as a legal question, it matters a great deal. American antidiscrimination law covers certain protected categories. Title VI of the Civil Rights Act prohibits discrimination in programs receiving federal support on the basis of “race, color, or national origin,” but—unlike many other antidiscrimination provisions—not religion.
So if Jews are deemed “just” a religious group, then they are not covered by Title VI. Publicly funded programs, under this view, could discriminate against Jews with impunity.
They feel betrayed, and Democrats’ newly announced support for President Trump’s trade deal isn’t helping.
In theory, progressives should be happy right now. After years of hesitation and deliberation, House Democrats are finally going to impeach Donald Trump, a man many liberals regard as the most dangerous president to ever occupy the Oval Office.
But as the House moves closer to approving two articles of impeachment against him—both concerning the president’s interactions with Ukraine—progressive activists and organizers have felt deflated instead. They had been advocating for Democrats to levy a much broader set of charges to paint a thorough portrait of the president’s wrongdoing, not the discreet list the House Judiciary Committee revealed on Tuesday. Making matters worse, they told me, House Democratic leaders’ near-simultaneous announcement of their support for Trump’s new trade deal diluted the significance of the moment, giving Trump and Republicans a key win on a day that should have been focused entirely on Democrats’ denunciation of the president.
Republicans are still waiting for a convincing case that the president was acting to advance his own personal interests.
The House Judiciary Committee has published articles of impeachment against President Donald Trump. Though potentially damning, the particular charges—abuse of power in connection with Ukraine and the 2020 election, and obstruction of Congress—face an unusual evidentiary problem compared with impeachments past. Because there is a plausible legitimate governmental justification for each of the allegations, the impeachers must establish not only that the alleged conduct occurred, but that the president acted for personal gain.
For most Democrats, Trump’s corrupt intent is so obvious that the proof is everywhere. For most Republicans, however, Trump’s corrupt intent remains the proposition to be proved. (I worked at the White House as the Council on Environmental Quality’s associate director for regulatory reform from 2017 to 2019.) That doesn’t bode well for the impeachers’ hopes of removing the president, because most of the evidence we’re likely to see is already contained in the report of the House Intelligence Committee, which was given the role of fact-finder under the House impeachment resolution. The Judiciary Committee ultimately backed off the theory that Trump had committed bribery, presumably because the evidence of a quid pro quo proved so thin, and abandoned the possible obstruction-of-justice charges suggested in Robert Mueller’s Report on Russian interference. The impeachers have failed to convince anyone who wasn’t already in their camp at the outset.
How retailers hide the costs of delivery—and why we’re such suckers for their ploys
It was a pair of feather earrings that helped Ann Miceli get out from underneath strangers’ cars. For years, Miceli had worked as an auto mechanic and picked up shifts in her spare time at Indianapolis restaurants. One day, she came across those earrings, and “it kind of sparked something.” Miceli bought a pair, and then some supplies to make her own. She listed some of her creations in a shop on Etsy and named it PrettyVagrant.
That was in 2011. In the intervening years, Miceli has sold nearly 30,000 of her handmade earrings and feather hair extensions, all of which she assembles by hand at home. After a couple of years, Miceli quit her job as a mechanic. Etsy “has given me the opportunity to work from home and watch my grandkids,” she told me. Everything was humming along nicely until last summer, when the site began implementing a new search algorithm that gives priority to sellers who guarantee free shipping. Those who charged even a few dollars, like Miceli, were removed from their spots on the first page of search results. In August, Miceli’s revenue was down 40 percent from the previous year—a huge dip that she blames on the free-shipping finagling.
A deadly shooting at a kosher grocery store in New Jersey is the latest manifestation of anti-Semitic violence that doesn’t fit in a neat, ideological box.
Jews have once again been murdered, and their children will have to live with the knowledge of that violence. This is the thought that has been haunting Rabbi David Niederman, a leader of the Satmar Hasidic Jewish community: How will he and others explain that two shooters apparently targeted a kosher grocery store run by members of his community in Jersey City, New Jersey, yesterday? “How long,” Niederman asked at a press conference hosted by New York City Mayor Bill de Blasio today, “are these children going to live with their scars?”
In recent months, America has faced nearly nonstop reports of anti-Semitism in all forms. A swastika scrawled on the outside of a synagogue. A string of assaults against Orthodox Jews in Brooklyn. Jewish students pushed out of progressive circles on campuses because of their presumed views on Israel. Slurs shouted at Jews out shopping during a measles outbreak. Especially in the realm of politics, fear is extremely close to the surface: Any statement or action from the Trump administration related to Jews immediately conjures intense backlash from progressives, whether or not it’s based on facts.