Reducing the Wealth Gap

I’ve had a lot on my mind lately and I find that writing really helps me think straight. One of the things I’m thinking about right now is why there is such a big disparity in wealth here where I live in the United States. I think there’s plenty of ways this can change, but some are more likely to occur than others. Here they are, along with what I think is the problem why it isn’t working:

More people should take advantage of opportunity

I see so many job postings and get so many calls from recruiters for technology jobs, particularly programming. Good programmers are in high demand and the salaries start at a decent wage and only go up as you become more skilled and senior as a programmer. If more people would just learn to code and make it their passion, doing it for hours a day, wealth would start to increase for others.

There’s also opportunity for people to invest on their own. With peer to peer lending at Prosper, and stock investing, there is opportunity to save and invest without any help from others.

Why this isn’t working

It’s fairly obvious to me that there are many not taking advantage of the opportunity to be technologically skilled. It takes hours a day of hashing through programming projects and sometimes it can be hard. It takes a high level of critical thinking and skill. After 10 years doing it, I think I’m decent at it with a lot to learn still. I think in a couple years someone could learn enough to get a job as an intern or junior software engineer, which would put them on the right track.

But this isn’t working because it’s MUCH easier to sit on our hind ends and watch TV, or browse our favorite website, or play Farmville, or do anything else that requires us to think less. And I feel for those who are in this trap where life’s habits revolve around consumption and comfort. Wealth is just going to be out of reach unfortunately…

People don’t invest in their own accounts either because it is scary and the lack of knowledge to do so. There’s no loading a saved game in life. If you flush money down the toilet, it doesn’t come back up the next day for you to try again. And if that happens once or twice, chances are, you may lose your stomach for investing and not try again.

More people should max out their retirement savings

A 401K max is around $17,500/year right now I believe. After 30 years with even just a 0% return, this is $525,000. With even a miniscule 3% match from an employer, this becomes $20,500 a year and $625,000 after 30 years with a 0% return. This is a big retirement bonus if one can start maxing even at age 35!

A dedicated person maxing their 401K at 25 years of age for 40 years would have $700,000. The biggest kicker for me is that if you apply a 7% rate of return for 30 years at $17,500 a year, which is pretty reasonable, you get: $1,768,778. With a 3% employer match, this becomes $2,071,997. This is huge and what I like is that this can be automated. Just set your contribution limit and away you go.

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Why this isn’t working

This isn’t working because most people need variety and don’t stay with a single employer for 30 years. Also, life gets in the way. People get sick, hurt, divorced, tired of working, and more. I think there’s a small percent of people who are able to achieve this kind of gain after 30-40 years with a maxed 401K, but it takes a good solid company and it takes hard work, dedication, a good attitude, and some luck to stay employed at a good job for 30-40 years.

The government should create programs that focus on building wealth for every American

The government created the 401K and now the new MyRA. Neither of these are going to work for everyone as I outlined above for the 401K. And the maximum amount for the MyRA is $15,000. After $15,000 in a MyRA, the money must be put in an IRA. These programs are at least something for people to take advantage of.

Why this isn’t working

This doesn’t work because some people fear the government will just take their money some day and don’t bother. Others just don’t have the means to invest in a 401K and the MyRA because all their money goes to ‘life’ for each pay check. As time goes on, that person is 60 and only has social security and maybe a pension to live on and their chance of creating wealth is long gone.

Is there a solution?

I’m not sure if there is an easy solution. Sam, from Financial Samurai, writes about the government’s new MyRA plan, but that can only go up to $15,000. He also talks about how Australia has a superannuation retirement program that mandates employers contribute a portion of worker’s salaries (9.25%) to a retirement account for each employee. I was surprised to read from him that Australia leads the world in inheritance at just over $500,000. That’s a large amount of money for anyone here in the U.S.!

I think a mandatory program like this is the real answer. It’s philosophical in that some might view it as socialism, forcing employers to contribute to an account like this. I think if CEO’s and Executives were willing to take less stock and salary to allow for employees to grow their wealth like this, it might work.

All of the individual responsibility options don’t work because most people would rather be comfortable than wealthy. They may complain about their money situation, but in the end, it’s still easier not to do anything about it personally. Some might argue that should be their fate then because personal responsibility trumps all. I’m not sure where I stand on that. I just know a mandatory program of some kind that bypasses people’s own laziness to save is the only solution I can think of that would work to better bridge the wealth gap.

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