Reporter's Notebook

What Is Driving America's Financial Woes?
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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.)

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The Danger of the DIY Retirement Savings Plan

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 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.

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.

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.

When it comes to middle-class financial woes, Mehrsa Baradaran, a law professor and author of How the Other Half Banks, notes the shifts in how lenders and borrowers look at credit:

Marquette [the Supreme Court decision Neal Gabler discusses] marked a pivotal cultural shift. Not only did it render centuries of interest-rate caps practically meaningless, it de-stigmatized the practice of usury.

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.

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.

Now imagine this scenario: