Meet Howard and Jean, an older couple I know, who like so many Americans of the “greatest generation” plugged into the New Deal world that promised a secure lunch pail for the middle class. Howard is a World War II veteran who became a mechanic; when he was younger he worked on automobiles for a local Chevy dealership, and then on commercial airliners for United Airlines out at the airport. Jean was a housewife and part-time sales clerk. They worked hard, saved their earnings, bought a house, opened passbook bank accounts for their five kids to save their dimes, sent all five of those kids to college. As the years stretched on, they began to prepare for their retirement. But something bad happened along the way to their retirement plans.
A university education is expensive (especially in the United States), and other rising living expenses began to nibble away at Jean and Howard’s middle-class lifestyle. As with so many of their fellow working-class Americans, their wages didn’t rise as fast as prices for a couple of decades, nor as fast as for other Americans enjoying a wealthier life. So at a certain point, Howard and Jean decided to take out a second mortgage on their home. It seemed like a perfectly good idea, lots of people were doing it. Their bank’s loan officer actually encouraged them; indeed, the friendly loan officer suggested they add on tens of thousands of dollars more beyond the value of their home just so they would have a bit of a cushion for themselves. Interest rates were reasonable, and the value of their home had been increasing in recent years. The loan officer showed them the charts — of what the value of their house had been, what it was now, how much it had increased recently, and where it likely would be in . . . five years, ten years. Heck, it almost seemed like free money, this second mortgage.
Indeed, it was free money, their own personal ATM . . . until it wasn’t. When the housing market crashed in 2008, so did Howard and Jean’s retirement plans. They had sunk most of their savings into their home since, like many Americans, their home was also their piggy bank. Across the nation, the collapse of the housing market in 2008 and the subsequent loss of approximately $8 trillion in housing-based wealth amounted to a direct hit on the nation’s retirement security. Like millions of other Americans, the value of Howard and Jean’s house plummeted, and while it has recovered some of its value, it is still worth less today than the mortgage they owe on it. They are what is known as “underwater,” a graphic but accurate term for their plight, which is shared by nearly 10 million Americans — almost a fifth of all homeowners — who are still financially drowning. Their house, which had been a big part of their retirement future, was now a lead stone around their necks, with the water rising.
Besides owning their own home, Howard and Jean had been thrifty and managed to save a modest amount of money — about $55,000 — which they had invested into a 401(k) retirement plan through Howard’s workplace. But like the small number of other middle-class Americans fortunate enough to save a bit — three-quarters of workers nearing retirement have less than $30,000 in their 401(k) — they had invested that small nest egg into several mutual funds. Unfortunately, the amount of their savings was nearly cut in half by the stock market collapses of 1999–2000 and 2008–2009. In a matter of a few years, their retirement plans had been shipwrecked as a result of the depreciation in value of both their home and private savings. As they readied for retirement in 2010, their financial prospects had been deluged by a flood of bad news.
Fortunately, Howard and Jean had another unshakeable asset to depend on — Social Security. They had paid into the Social Security fund all their working lives, not always sure what this 6.2 percent deduction from their paycheck was good for, and they were susceptible to arguments from fiscal conservatives that Social Security should be turned into private retirement accounts so Howard and Jean could keep more of their wages in their pockets. But suddenly, in the depths of their financial flooding, Howard and Jean understood exactly why Social Security was important — it created a buffer between them and the whirlpool threatening to suck them down.
While Social Security was their thank-God life jacket, as a life jacket it is rather small. By design, Social Security is only supposed to replace about 30–40 percent of your wages at retirement; yet most financial advisors say you will need 70–80 percent of preretirement earnings to live comfortably. So Howard and Jean really had to tighten their belts, and their middle-class standard of living took a big hit. But at least they did not end up destitute or homeless. Theirs is not a happy story, but the ending of that tale could have been far worse.
Howard and Jean are not the only older Americans in this situation. Many baby boomers, seniors, and soon-to-be’s are facing similar circumstances, particularly in the aftermath of the worst economic collapse in the United States since the Great Depression. But what has become known as the Great Recession was just the latest disruption to show that the working life can be a precarious one.
According to the Economic Policy Institute, any Americans who started their working careers in the mid-1960s have witnessed seven recessions — in 1969, 1973, 1980, 1981, 1990, 2001, and 2008 — and have lived through inflation, stagflation, oil shocks, oil rationing, the stock market crash of 1987, the savings and loan collapse, the bursting of the dot-com bubble, the bursting of the housing bubble, and the stock market crash of 2008. Add to that the real-estate and leveraged-buyout implosions of the early 1990s; the Enron and WorldCom bankruptcies in the early 2000s; the meltdown of Lehman Brothers; the bailout of AIG, the financial industry, and the auto companies; the issuing of IOUs by the nation’s largest state, California, to cover its debts; and a spotty recovery following the worst economic collapse since the Great Depression. In addition, working Americans have seen the national unemployment rate climb above 10 percent twice, and all this during a time that has seen virtually no wage growth for the vast majority and a decline in traditional retirement pensions.
Even in the midst of this Superman-sitting-on-Kryptonite economic recovery, the Chinese bubble collapse in August 2015, which led to a huge stock market sell-off around the world (ignominiously named the China Syndrome), showed how fragile the global stock markets remain — how could any sane person possibly suggest the markets as a suitable target for investing your life’s savings? The last several decades have been one hellacious roller-coaster ride, with casualties scattered all across the pockmarked landscape in which 145 million working Americans are toiling away. For all but the most well off, navigating the ups and downs of the economy has not been easy.
Since the 1930s, Americans of all political stripes were lucky that they had not only Social Security but also other government programs to fall back on. Howard and Jean are not the only Americans who, when faced with a tough situation that threatened their and their family’s economic vitality, reached out and grasped the “visible hand” of government. Hundreds of millions of Americans over the last three-quarters of a century have benefited from the New Deal society that was forged decade by decade, law by law, in the aftermath of the Great Depression. President Franklin Roosevelt embraced the unique capacity of government to pull people together and create pools of social insurance that shielded all Americans against the risks and vicissitudes that we all face in common. Besides Social Security, other federal laws and national programs — a long alphabet soup of policies that FDR and successor presidents passed — have shaped the world in which all Americans alive today grew up. These include Medicare, Medicaid, the Family and Medical Leave Act, student financial aid, the Federal Housing Administration, the Fair Labor Standards Act, the National Labor Relations Act, the Occupational Safety and Health Act, Equal Employment Opportunity, the Civil Rights Act, laws against discrimination, and laws for the environment and consumer protection.
Our understanding of who we are as a people is inseparable from these policies — yet we don’t always recognize it, and many Americans today who are most dependent on these programs like to gleefully bash and deride government. Forty-four percent of Social Security beneficiaries say they have never used a government program; so do 60 percent of recipients of the federal home mortgage interest deduction, 43 percent of unemployment insurance recipients, and 40 percent of Medicare recipients. Each of these programs and laws were passed, with painstaking effort, because they responded to specific situations and conditions in which many Americans — including the most vulnerable, such as the elderly and children — ended up in tough circumstances through no fault of their own, but because of the roller-coaster swings of the economy.
But the New Deal system wasn’t created by the wealthy and patrician Roosevelt, and the political and business leaders of the time, merely as an act of charity or compassion for the “one-third of a nation ill-housed, ill-clad, ill-nourished” (as President Roosevelt described our country in his famous Second Inaugural Address). Following the devastation of the Great Depression, it was also a way of remaking the broader macroeconomy into one that was more stable, and of using government’s levers of fiscal stimulus, popularized by British economist John Maynard Keynes, to grow the economic pie. That in turn fostered a broadly shared prosperity, which gave rise to the middle class, which became the consumer engine that purchased the goods and services produced by America’s businesses. It was a virtuous circle, and while the system wasn’t perfect, it worked — it created the highest standard of living for more people in human history. That in turn made the United States the envy of the world, with the middle-class dream becoming an important part of our nation’s allure to people everywhere, which gave America more clout on the global stage.
But beginning in the 1970s, the United States engine started losing some of its steam. The plight of the middle class grew more tenuous, resulting in stagnant wages, less job security, the decline of health benefits and the safety net, and the cracking of Americans’ nest eggs when their savings and homes deflated after the collapse of the stock and housing bubbles. Over the last three decades, the US economy has more than doubled in size, but most of the benefits from that growth have gone into the pockets of a fortunate few. Corporate profits are at their highest level in at least eighty-five years, while employee compensation is at its lowest level in sixty-five years. The Federal Reserve’s Survey of Consumer Finances found that the top 10 percent of families own 75.3 percent of the nation’s wealth, while the share of wealth held by the bottom 50 percent of families has fallen to just 1.1 percent. Income inequality is now as bad as it was in 1928, just before the Great Depression, with the top one-tenth of 1 percent of Americans — a mere 160,000 families — now owning nearly a quarter of the nation’s wealth, a share that has doubled over the last few decades. Incredibly, the share of wealth held by the bottom 90 percent is no higher today than during our grandparents’ time. It’s as if the New Deal had never existed.
And future prospects do not look much brighter. Even as corporations have seen a 30 percent rise in profits since the Great Recession in 2008, wages as a share of national income fell to their lowest point since after World War II. Real median household income is now 8 percent lower than it was in 2007. Many of the jobs that were lost during the Great Recession of 2008 were what used to be considered “good jobs” — they offered decent pay, health care, retirement, and a comprehensive safety net, with a measure of job security. Now, nearly a fifth of the job growth since the recession ended has been in temporary jobs, and nearly half of the new jobs created in the so-called “recovery” pay only a bit more than minimum wage. Six years into the recovery, the economy had nearly 2 million fewer jobs in mid- and higher-wage industries than before the recession and 1.85 million more jobs in lower-wage industries. Three-fourths of Americans now live paycheck to paycheck, with little to no emergency savings to rely on if they lose their job. The fears of the middle class, which the Tea Party and politicians like Donald Trump have exploited masterfully, are not paranoia. Their standard of living is in fact eroding.
Yet as bad as the impacts of the Great Recession have been, it did not create the retirement crisis by itself. Rather, the causes are rooted in the larger fundamental economic shifts of the last thirty years. Deregulation, deindustrialization, automation, and hyper-financialization of the economy have all contributed to this mudslide over the cliff. Looking ahead, the shape of the future is coming increasingly into view, and it’s clear that other long-term trends warn of additional risks for the middle and working classes.
A 2015 survey from the Freelancers Union and Upwork found that more than one in three Americans — 54 million workers — did freelance work in the past year. Other estimates predict that within ten years nearly half of the 145 million employed Americans — 60–70 million workers — could well find themselves on shaky grounds, turned into so-called “independent workers,” working part time and cobbling together multiple jobs as contractors, temps, gig-preneurs, and contingent workers. Even an increasing number of regularly employed, part-time workers are subjected to conditions like “just-in-time scheduling” in which employers dictate the daily work schedule with no employee input or even advance notice, putting these workers on permanent call (and making it impossible for them to plan their lives, hire babysitters, schedule doctor appointments, and more). Increasingly, all of these different categories of workers have little job security, reduced wages, and a deteriorating safety net — including inadequate retirement resources. So-called “sharing economy” companies like Uber, Airbnb, TaskRabbit, Upwork, and Instacart are allegedly “liberating workers” to become “independent” and “their own CEOs,” but in reality workers are being forced to take ever-smaller jobs (“gigs,” “micro-gigs,” and “nanogigs”) and wages while the companies profit handsomely. Even many full-time, professional jobs and occupations are experiencing this precarious shift.
Indeed, in the gigs of the sharing economy, working for these app- and web-based companies, some contractors, rabbits, taskers, day laborers, and freelancers have multiple employers in a single day. The sharing economy’s app- and web-based technologies have made it much easier to hire and fire freelancers and contractors, so why would any employer hire full-time workers anymore? We are at the initial stages of the impacts of these new “job brokerage” technologies and how they will affect the labor force over the next several decades. Set to replace the crumbling New Deal society is the darker world of a “freelance society” in which, in the words of one new economy visionary, “companies want a workforce they can switch on and off as needed” — just like a faucet or a television. Hardly a “sharing” economy, it’s more correctly described as a “share the crumbs” economy.
Consequently, for Howard and Jean’s children and grandchildren, the ground looks even shakier than it does for Howard and Jean. Their future is still infused with that age-old American hope and expectation of a generational inheritance, but economic opportunity and fairness are fading for the younger generations. The New Deal society is slowly disappearing, melting away like the polar ice caps. And that in turn will be greatly destabilizing to the broader macroeconomy. For at the end of the day, if not enough people have sufficient income in their pockets and bank accounts to buy up all the products and services that US companies produce, the economy could reach a dangerous disequilibrium. Seventy percent of the economy is driven by consumer spending, but what happens if consumers’ capacity to buy starts shriveling up? We could well face the prospect of an “economic singularity,” the tipping point at which our economy implodes from too little consumer demand because the wealth has been captured by a small number of powerful economic players who extract the best of our nation for their own private use. Everyone else will be left to scramble for the scraps via the share-the-crumbs economy.
Considering the nation’s future, we can see that the American middle and working classes, as well as the poor, are occupying increasingly shaky ground. Only affluent Americans have emerged in better shape than before. But for more and more of their fellow Americans, the dream of a secure and stable life, including their retirement prospects, is becoming increasingly dim.
The Shape of the Retirement Crisis
When our current retirement system was conceived after World War II, during the years when Howard and Jean came of age, the foundation for old-age security was understood as a “three-legged stool.” The three legs were (1) private, employer-based retirement, like pensions and (much later) 401(k)s; (2) Social Security; and (3) personal savings centered around homeownership. But as we will see, private-sector pensions now are rare, and the number of public-sector employees (and their pensions) has declined. With the housing market crash in 2008, combined with increasing volatility in the stock market and flat wages for all but the wealthiest people, private savings for most Americans hasn’t kept up with the need. In the alluring narrative of the American Dream, homeownership has been not only a means for providing a secure domicile, but also a core element of household savings and retirement plans. The collapse of the housing market and the subsequent loss of approximately $8 trillion in housing-based wealth amounted to a direct hit on retirement security. Some of that has recovered, but the economic prospects of many Americans have not.
