Friday, September 26, 2014

Income Inequality in the US

                                                       (Comments due by Oct. 4, 2014)
The income disparity between the richest and poorest Americans has grown wider in recent years, according to a report released Thursday by the Federal Reserve, data that should add fuel to the growing political debate over income inequality.
In effect, the report titled the Fed’s Survey of Consumer Finance said what many economists have been saying for years: the richest Americans are getting richer while the poorest are getting poorer. And the middle-classes, meanwhile, are standing still.
The results of the survey are released every three years.
Families with the lowest incomes saw “continued substantial declines” in average real incomes between 2010 and 2013, according to the Fed’s survey, which continues a pattern established between the central bank’s 2007 and 2010 surveys.
Families defined as middle to upper-middle class (which fall between the 40th and 90th income percentiles) “saw little change in average real incomes” between 2010 and 2013 and consequently have failed to recover the losses experienced between 2007 and 2010, the report said.
“Only families at the very top of the income distribution saw widespread income gains between 2010 and 2013, although mean and median incomes were still below 2007 levels,” the Fed survey found.
The political debate over income inequality has led some -- mostly Democrats -- to call for higher taxes on the wealthy, while others -- mostly Republicans -- argue that higher taxes ultimately lead to economic stagnation and could act as another obstacle to the ongoing economic recovery.
The central bank’s report described “substantial disparities in the evolution of income and net worth” since 2010 despite improvements in U.S. labor markets and gradual economic growth since the 2008 financial crisis and recession that followed.
Overall, average income rose 4% from 2010 while median -- the midpoint with half higher and half lower -- income fell 5%, “consistent with increasing income concentration during this period,” according to the Fed’s report.
Meanwhile, the top 3% of families saw their share of U.S. income rise to 30.5% in 2013 from 27.7% in 2010. Fed economists said the data reflect a return to the economy's prerecession trend, after the income distribution narrowed during the recession when top-earning families saw their incomes fall. The top 3% had held 31.4% of all income in 2007.
“Overall, between 2010 and 2013 there was little movement in median and mean net worth, as the median fell a modest 2% and the mean increased slightly. Consistent with income trends and differential holdings of housing and corporate equities, families at the bottom of the income distribution saw continued substantial declines in real net worth between 2010 and 2013, while those in the top half saw, on average, modest gains,” the report found.
In addition, ownership rates of housing and businesses fell substantially between 2010 and 2013.
And retirement plan participation in 2013 continued to decline, following a pattern established between the 2007 and 2010 surveys for families in the lower half of the income percentile. Participation rebounded slightly for upper-middle income families, but it did not move back to the levels observed in 2007, the Fed said.
Ownership rates for most assets -- from stocks to retirement accounts, cars to homes -- fell from 2010 to 2013, which “indicates that while most families continue to hold some type of asset, many more families now hold fewer different types of assets,” the report said. Some 65.2% of families owned their primary residence in 2013, the lowest homeownership rate since 1995.

Saturday, September 20, 2014

Household Networth

The latest released statistics show that finally, the networth of households in the US is above where it was in 2007, but barley. 
THE net worth of American households is now 20 percent higher than it was before it began to decline in 2007, the Federal Reserve reported this week. It said the households together were worth $81.5 trillion at the end of the second quarter, higher than ever and up 10 percent from a year earlier.
By another measure, household net worth is a little short of the record highs reached before the recession. It amounted to 471 percent of the nation’s gross domestic product in the second quarter, just short of the record 473 percent set in early 2007.
Those figures are not adjusted for inflation. But adjusted for the change in the Consumer Price Index, household wealth is also at a record high, 4 percent above the 2007 level.
The recovery in household wealth has come in ways that favor the wealthiest households. The Fed estimated that real estate owned by households is worth $22.9 trillion, 6 percent less than seven years earlier but 27 percent more than at the bottom of the real estate market in 2011.

change fPercentage rom Q2 2007

2Q ’14
Stocks and
Mutual funds
Real Estate

The biggest gains for households came in the equity markets. The Fed said households now owned $21 trillion in stock and mutual fund shares, 37 percent more than seven years earlier and almost 160 percent more than they owned at the bottom of the bear market in 2009.
While many people own stocks and mutual fund shares, by far the largest holdings are among those who are the wealthiest. In 2012, more than a third of dividends reported on tax returns went to taxpayers earning at least $2 million a year. That is more than double the share of dividends that went to those with taxable incomes of $100,000 or less.
During the recession, many households moved into safer fixed-income assets, including bonds issued by companies and governments. But with speculation that interest rates will rise, reducing the value of outstanding bonds, households have reduced their holdings to $3.5 trillion, a few billion less than in 2007. Total debt for households and nonprofit organizations equaled 77 percent of G.D.P., the lowest level since 2002. That figure peaked at 96 percent in early 2009.
Debt has also fallen for other sectors of the economy. The financial sector, including banks, had total debt at the end of the second quarter equal to 81 percent of G.D.P., the lowest level since 2000 and down from a peak of 119 percent. Loans to nonfinancial businesses have been rising in recent quarters, and now equal 67 percent of G.D.P., but that is lower than the peak of 74 percent reached in 2009.
The decline in household debt is largely due to lower mortgage debt, particularly home equity loans. But consumer credit has continued to rise and now equals a record 19 percent of G.D.P.
That is largely because of the continued surge in student loan debt — an obligation concentrated in younger households and among those who are far from wealthy. It has more than doubled since 2007. In 2006, when the Fed began to report on student loan debt as a separate category, the debt totaled $509 billion, or 22 percent of total consumer debt. Now, it equals $1.3 trillion, a 40 percent share of consumer debt.
That is more than Americans owe either on credit card debts ($839 billion) or auto loans ($919 billion).
Auto debt, however, has recovered and is now 17 percent higher than it was before the recession. That is 5.3 percent of G.D.P., well below the 6.5 percent record set in 2003.
While private sector debt has generally declined, at least relative to the size of the economy, government debt has been rising. But with the federal budget deficit falling, the ratio of federal government debt to G.D.P. slipped to 72.9 percent in the second quarter from 73.6 percent three months earlier.

Saturday, September 13, 2014

Student Debt Burden

JANET LEE DUPREE, 72, was surprised when she received her first Social Security benefits seven years ago. About one-fifth of her monthly payment was being withheld and she called the federal government to find out why.
The woman, who is from Citra, Fla., discovered that the deduction from her benefits was to repay $3,000 in loans she took out in the early 1970s to pay for her undergraduate degree.
“I didn’t pay it back, and I’m not saying I shouldn’t,” she said. “I was an alcoholic, and later diagnosed with H.I.V., but I’ve turned my life around. I’ve been paying some of the loan back but that never seems to lower the amount, which is now $15,000 because of interest.
“I don’t know if I can ever pay it back.”
She is among an estimated two million Americans age 60 and older who are in debt from unpaid student loans, according to data from the Federal Reserve Bank of New York. Its August “Household Debt and Credit Report” said the number of aging Americans with outstanding student loans had almost tripled from about 700,000 in 2005, whether from long-ago loans for their own educations or more recent borrowing to pay for college degrees for family members.
The debt among older people is up substantially, to $43 billion from $8 billion in 2005, according to the report, which is based on data from Equifax, the credit reporting agency. As of July 31, money was being deducted from Social Security payments to almost 140,000 individuals to pay down their outstanding student loans, according to Treasury Department data. That is up from just under 38,000 people in 2004. Over the decade, the amounts withheld more than tripled, to nearly $101 million for the first seven months of this year from over $32 million in 2004.
While older debtors account for a small fraction of student loan borrowers, who have accumulated nearly $1 trillion in such debt, the effect of owing a constantly ballooning amount of debt but having a fixed income can be onerous, said Senator Bill Nelson, Democrat of Florida, chairman of the Senate Special Committee on Aging.
“Those in default on their loans can see their Social Security checks garnished, leaving them with retirement income that leaves them well below the poverty line,” he said at a committee hearing this week to examine the issue.
“Some may think of student loan debt as a young person’s problem,” he said, “but, as it turns out, that is increasingly not the case.”
That is the problem that Rosemary Anderson, 57, described to the committee. The woman, who is from Watsonville, Calif., has a home mortgage that is under water, as well as health and other problems, and $64,000 in unpaid student loans. She borrowed the money in her 30s to fund her bachelor’s and master’s degrees, but fell behind on her student loan payments eight years ago.
As a result of compound interest, her debt has risen to $126,000. With her $526 monthly payment, at an 8.25 percent rate, she estimates that she “will be 81” by the time it is paid, and will have laid out $87,487 more than she originally borrowed.
Mrs. Dupree, in a telephone interview, said she, too, needed some relief. As a part-time substance abuse counselor for a nonprofit based in Ocala, she said she could barely afford the $50 each month that she negotiated with the federal government as payment for her growing debt.
She is supporting a measure introduced by Senator Elizabeth Warren, Democrat of Massachusetts, and a committee member, that would allow people who borrowed money for education before July 2013 to refinance at current, lower interest rates.
A person who took out an unsubsidized loan before July of last year “is locked into an interest rate of nearly 7 percent and older loans run 8 percent to 9 percent and even higher,” Ms. Warren said. The measure would lower the interest rate to 3.86 percent for undergraduate loans and a little higher for graduate and parent loans.
But the future of the bill is unclear. It was stalled in the Senate in June by Republican senators, like Lamar Alexander, of Tennessee, who said college students didn’t need a taxpayer subsidy to help pay off a student loan. “They need a good job.”
The measure would help 25 million people refinance their student loans, but impose a tax increase on people making over $1 million — which Senator Mitch McConnell, of Kentucky, the majority leader, labeled a “tax increase bill styled as a student loan bill.”
Adam Brandon, executive vice president of the conservative organization FreedomWorks, which opposed Senator Warren’s bill, said such legislation “only makes the current student loan bubble worse by continuing to encourage people to take out more loans than they can afford.
“The market needs to work out who can afford these loans. We shouldn’t be trying to game the market and have people end up with so much debt they can’t afford their car payments.”
Even though the number of retiree debtors is small, $1,000 deducted from their Social Security payments “can make a real difference for affected senior citizens or disabled adults surviving on Social Security,” said Sandy Baum, a professor at the George Washington University Graduate School of Education and Human Development, and a researcher at the Urban Institute.
For most beneficiaries, she said, “the average monthly payment of $1,200 is the primary source of income.” While the government should be holding student borrowers to account for their debt, “and there may be some who just decide not to pay,” she said “most are people who are not earning money so it doesn’t make sense to ask them to pay.”
As the ranks of retirees grow, more attention is being focused on the education debt incurred by the next group of people approaching retirement, those 50 to 64 years old. A 2013 AARP study of middle-class families found that aging households were carrying increasing amounts of debt.
While mortgages account for most of that debt, education debt levels have been rising for the preretiree group, noted Lori A. Trawinski, a director at the AARP Public Policy Institute.
“As of 2010, 11 percent of preretiree families had education debt with an average balance of $28,000. Growing debt burdens pose a threat to financial security of Americans approaching retirement, since increasing debt threatens their ability to save for retirement or to accumulate other assets, and may end up leading them to delay retirement,” she said.
The Government Accountability Office warned this week about the growth of educational debt among seniors. It released a report that relied on different data from that used by the Federal Reserve Bank of New York, but nonetheless painted an ominous picture of lingering debt burden.
“As the baby boomers continue to move into retirement, the number of older Americans with defaulted loans will only continue to increase,” Charles A. Jeszeck, the G.A.O. director of education, work force and income security, testified at the hearing. “This creates the potential for an unpleasant surprises for some, as their benefits are offset and they face the possibility of a less secure retirement.”
More than 80 percent of the outstanding balances are from seniors who financed their own education, the G.A.O. report concluded, and only 18 percent were attributed to loans used to finance the studies of a spouse, child or grandchild.
But the default rate for these loans is 31 percent — a rate that is double that of the default rate for loans taken out by borrowers between the ages of 25 and 49 years old, according to agency data.
“Such debt reduces net worth and income and can erode retirement security,” Mr. Jeszeck said. “The effect of rising debt can be more profound for those who have accumulated few or no financial assets.”
And such student loan debt “can be especially problematic because unlike other types of debt, it generally cannot be discharged in bankruptcy,” he added.
As a result of unpaid student debt, Social Security payments can be reduced to $750 a month, which is a floor Congress set in 1998. Senator Susan M. Collins, Republican of Maine, and a member of the committee on aging, said she was planning to introduce a measure to adjust the amount for inflation “to make sure garnishment does not force seniors into poverty.”
For people like Ms. Anderson, help cannot come too soon.
“I incurred this debt to improve my life,” she told the committee, “but the debt has become my undoing.”