For many American families, it has been a once-in-a-lifetime embarrassment of riches. They’ve watched their personal wealth soar along with the Dow Jones industrial average.
But for well over half the population, the Bull Run of the ’90s might as well have been the Roaring ’20s. Mutual funds? A 401(k)? An individual retirement account?
“I just haven’t done any of that,” said Vietnam veteran Phil Tarnowski, a 45-year-old Elk Grove Village cab driver who’s been scrambling to make ends meet since he lost his job as a skilled machinist in 1993. “There are many times I wish I would’ve started sooner to put money away for stocks.”
According to the latest Federal Reserve Board data, Tarnowski is not alone. As of 1995, nearly 60 percent of employed Americans still didn’t own stock or an equity mutual fund, either on their own or through company-sponsored accounts.
A more recent Peter Hart Associates poll, conducted a year ago for the Nasdaq stock market, put the share of Americans who have at least some stock at 43 percent. Although that’s twice the 1980s level, it still leaves nearly 70 million working Americans untouched by the spectacular runup in stock prices over the past few years.
That worries analysts who track wealth and income distribution across the country. The fact that less than half the nation’s households are participating in this unprecedented creation of stock market wealth is exacerbating the gap between rich and poor that widened in the 1980s and ’90s.
That, these analysts fear, could lead to political instability down the road.
“People who’ve seen a spectacular increase in their personal wealth might be willing to see substantial cuts in Social Security and Medicare if it means lower taxes for them,” said Robert Reischauer, a senior fellow at the Brookings Institution. “That will create real problems for those people who didn’t participate in this runup in the stock market.”
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That’s already weighing on the mind of 46-year-old Debra Lord, a secretary at Samsung Factory Service. Though she has no 401(k) or pension plan through work and doubts Social Security will provide a decent income in her retirement years, the Chicago resident refuses to take the plunge into stocks.
“It gets scary out there, and I don’t have money to risk,” she said. Her savings are parked in low-yielding certificates of deposit. “I’m really reluctant to use it (to buy stocks) because whatever money I have is what I’ll have to live on. Six or 7 percent for 20 years is better than nothing.”
That attitude poses a major roadblock for those pushing the latest Washington fix for Social Security: giving individuals the right to invest a portion of their retirement payroll deduction in the stock market. Millions of Americans who live from check to check feel totally at sea when navigating the uncharted waters of personal finance.
“I keep putting off an appointment with my stockbroker because I feel like he’ll convince me to buy something I don’t want,” Lord said. “My problem is I watch too many `Datelines’ and `60 Minutes’ and have become too suspicious.”
Those qualms are a world away from the super-rich who inherited their stocks, the high-flying entrepreneurs with computer and biotechnology startups or the corporate executives who’ve been minting money by cashing in their stock options. For them, the past 15 years have been one long party with only a couple of short interruptions.
And for many college-educated Baby Boomers, this decade’s fantastic bull market has dispelled their long-standing fears that they would be unable to offer their kids what their parents had offered them. Now, for these fortunate few, college tuition at last seems doable. The hazy outline of a prosperous retirement lies over the rainbow.
But the news media’s relentless focus on the raging bull market disguises the fact that while millions more Americans have entered the market in recent years, many risk falling behind. The Fed’s 1995 survey (another one will be conducted this year with results published a year later) showed 41 percent of families had direct or indirect stock holdings, up from 37 percent in 1992 and 31.7 percent in 1989.
Moreover, most of the families that have stock didn’t have much. The median value (half had more, half had less) of stock holdings was just $13,500 in 1995, up from $10,400 in 1989.
Among families earning $50,000 to $99,000 a year, two-thirds held stock, but their portfolios averaged just $21,300. On the other hand, the nearly 84 percent of families earning over $100,000 a year had stock portfolios averaging $90,800 in value.
The number of families owning stock will certainly rise in the next survey, and the average holdings will no doubt be up sharply. But as last year’s Nasdaq survey suggested, it still won’t reach half the population, and the concentration of wealth will remain.
“The top 1 percent of households owns about half of all equities,” said Dean Baker, an economist at the Economic Policy Institute, a labor-oriented think tank in Washington. “The next 9 percent owns under 40 percent. The bottom 90 percent of stock-holding families had just 13.6 percent of all equities” in the last survey.
There’s no doubt that the 1990s bull market has improved America’s overall well-being. At the end of every year, the Fed calculates the total net worth of America’s households, and at the end of 1997, Americans held $9.1 trillion in stock both directly and indirectly (through pensions, mutual funds, trusts and life insurance policies).
That was a 50 percent gain since 1995, in large part due to the runup in stocks. It now represents 23 percent of all householders’ net worth, which also included cars and other tangible assets (31 percent), real estate (22 percent) and cash in checking, savings and time deposits (10 percent).
That level of stock equity marked the highest level of family assets held in stocks since 1968.
But looking at the aggregate gains for stocks in the 1990s obscures its distribution among families, since it represents the holdings of everyone from Bill Gates on down. “Absent rapid wage increases for people in the lower half of the population, it will be very difficult to see any broad participation in the stock market,” said Dimitri Papadimitriou, executive director of the Jerome Levy Economics Institute of Annandale-on-Hudson, N.Y. “People in the lower half are just skimping through.”
That half the population is missing out on the boom can be seen in the pattern of investments in mutual funds, which has been the most popular form of stock holding in recent years. According to the Investment Company Institute, a Washington-based mutual fund trade group, only 37 percent of U.S. households held mutual funds in 1997, and that includes families that held stock funds either individually or through retirement accounts.
It also included mutual funds that were invested in certificates of deposits and bonds. The value of assets held in the median family’s mutual fund accounts last year was $18,000.
Another factor holding back Americans participating in the stock market is the limited reach of supplemental retirement plans like pensions and 401(k)s. The traditional pension plan, which generally holds a substantial part of its assets in stock, now applies to only 25 million actively working Americans, down from 30 million in 1981, according to the Employee Benefit Research Institute in Washington, D.C. Many large companies that once offered pensions have eliminated them in favor of defined contribution plans like 401(k)s, which limit their long-term liability.
But 401(k)s still reach only 25 million workers, according to the Windsor, Conn.-based Spectrem Group, which tracks that data. That’s twice the level of 1987 and it’s growing fast. .
But even combining the number of people with 401(k)s and pensions (some workers have both) leaves roughly 58 percent of America’s work force of 130 million without supplemental retirement coverage besides savings. “Half the work force works for small entrepreneurs, and most small entrepreneurs offer no retirement plan at all,” said Dallas Salisbury, president of the Employee Benefit Research Institute.
Put Phil Tarnowski’s employer–303 Taxi of Elk Grove Village–in that camp. But he was philosophical about missing out on the seemingly endless stock market party.
“You watch it going up and you say, `Geez, I’m sorry I’m not in there,’ ” he said. “But on the other side of the coin, one of these days it’s going to take a dive. When it does, I’m going to say, `I’m glad I’m not.’ “