[Congressional Record Volume 146, Number 47 (Thursday, April 13, 2000)]
[Senate]
[Pages S2660-S2661]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                             THE WEALTH GAP

  Mr. KERREY. Mr. President, in the debate over tax cuts our attention 
is understandably drawn to the question of who pays those taxes and 
from this a debate commonly ensues over who should get the benefits of 
tax reductions. This argument leads us to consider the disparities of 
income and the need to make certain that our tax laws are not written 
so as to increase income inequality and hopefully to write our tax laws 
in order to give a boost to those whose wages are lower.
  Today, I rise to talk about a problem facing Americans that is 
related to but different from the income inequality. The problem I will 
address today is the growing gap between the richest Americans and the 
poorest.
  The latest Statistics of Income Bulletin from the IRS shows that the 
combined net worth of the top 4.4 million Americans was $6.7 trillion 
in 1995. In other words, the top 2.5 percent of our population held 
27.4 percent of the Nation's wealth in the mid-1990s. No doubt this 
group of wealthy Americans feels very financially secure.
  But what about the other 97.5 percent of Americans? Is the security 
of wealth spread in a reasonably equitable way across all American 
households? The answer in my view, is a tragic and emphatic no.
  Although there is a perception that the recent rapid growth in the 
stock market has produced widespread economic gains among all income 
groups, a majority of households still do not own stock-based assets 
and, thus, have not participated in the growth of the 1990s economy. A 
complete picture is presented in the United States Federal Reserve's 
Survey on Consumer Finances. This report provides us with the following 
statistics:
  Since 1989, the share of net worth owned by the top 1 percent of 
American households has grown from 37.4 percent to 39.1 percent, while 
the share of net worth held by the bottom 40 percent of households has 
dropped from .9 percent to a statistically near insignificant .2 
percent.
  Nearly 60 percent of the wealth held by families in the lowest 90 
percent of the population is in the family home--not liquid assets that 
can be used as a source of income and security at retirement. Families 
in the lowest 90 percent of the population had only 3 percent of their 
assets in stocks and bonds.
  While an increasing number of Americans are purchasing stock-based 
equities--49 percent in 1999 vs. 40 percent in 1995--only 29 percent of 
households own stock worth more than $5,000, and the top 10 percent of 
households in the distribution hold 88.4 percent of the value of all 
stocks and mutual funds. In fact, the top 1 percent holds 51.4 percent 
of the value of all stocks and mutual funds--while the bottom 90 
percent hold just 11.6 percent of the total value.
  These statistics show that the gains of the great 1990s stock market 
runup have not benefitted a majority of Americans. The gains have not 
narrowed the gap between the wealthiest in America and the poorest in 
America. In fact, the data analyzed in a study done by the preeminent 
wealth statistician, Mr. Ed Wolff, reveals that the wealthiest 10 
percent of households enjoyed 85 percent of the stock market gains from 
1989 until 1998.
  Why should we be so concerned about the growing wealth gap? I believe 
the answer is that the ownership of wealth brings security to people's 
lives and because the ownership of wealth opens up new opportunities 
and because the ownership of wealth transforms the way people view 
their futures.
  An individual with no financial assets--and no means to accumulate 
financial assets--cannot count on a secure retirement, cannot ensure 
that his or her future health care needs will be met, and cannot save 
effectively for important life milestones, such as the purchase of a 
first home or the funding of a child's college education.
  Americans clearly understand and desire the freedom and security that 
comes with wealth. We can point to the ongoing increase in 
participation rates in 401(k) plans as evidence that people are 
concerned about amassing wealth for a secure retirement. We can even 
point to the continued growing popularity of lotteries and game shows 
like ``Who Wants to Be A Millionaire'' as evidence that people value 
the security of wealth--especially wealth that is acquired quickly.
  The virtues of savings and wealth accumulation are clear. But if the 
virtues are so clear, why aren't more Americans voluntarily increasing 
their savings? Not a TV show goes by without an advertisement from a 
financial services company offering investment advice and investment 
products. Not a week goes by without a front page story about the 
Social Security funding ``crisis''--implicitly warning people to save 
for their own retirements. So why aren't more Americans saving?
  I have identified barriers that I believe continue to prevent a 
substantial portion of the American population from being able to save, 
to invest, and to accumulate wealth.
  Barrier No. 1 is education.
  No single factor is a greater predictor of income and wealth than 
education. Property educated and trained individuals can command a 
premium salary because they are in high demand and in short supply. 
Only one-third of households are headed by someone with a college 
degree. These households have a median before-tax income of $55,000 and 
a median net worth of $146,400. Households headed by a person with no 
high school diploma have a median income of $15,500 and a net worth of 
$20,000.

  In addition to disparate levels of educational attainment, there is a 
huge problem in America with a specific lack of investor education. 
Economics and Finance are not required courses in most school districts 
across the United States. As a result, too few people understand the 
magic of compounding interest rates and, as a consequence, wait too 
long to begin saving for their retirement.
  The second barrier is income.
  Of course, one of the fundamental rules of wealth accumulation is 
that you must have income that you can set aside in order to create 
substantial wealth. A quarter of families in the United States are 
bringing home between $10,000 and $25,000 a year. Forty percent of 
American households are bringing in less than $31,000 per year. After 
FICA taxes of $2,372 and $2,600 in Federal and State income taxes, a 
typical family of four has little left over for savings.
  Not only have low and moderate income Americans not shared in the 
growth of a booming stock market, but they have also not shared in the 
growth of weekly paychecks. According to the most recent Survey on 
Consumer Finances by the Federal Reserve Board, mean income grew 
between 1995 and 1998 only for families headed by individuals with at 
least some college education--mean incomes for all education groups in 
1998 were lower than they had been in 1989. Median income only rose 
appreciably between 1989 and 1998 for those with a college degree.
  When you look at two of the lowest income groups, the story of income 
stagnation is quite grim. Nearly 13 percent of families earned less 
than $10,000 in 1998. The median salary of this group was $6,200--a 
real decline of 6 percent since 1989. Nearly one-quarter of families 
earned between $10,000 and $25,000 in 1998. Of these families, the 
median salary was $16,900--a real increase of only 2.4 percent since 
1989. Clearly, the capacity of this group to save on its own is very 
limited.
  Barrier No. 3 is payroll taxes.
  The payroll tax may not seem like much of a barrier to Americans with

[[Page S2661]]

income over $100,000, who only have to pay taxes on the first $76,200 
of income, but to American families earning less than $25,000--40 
percent of all households--it is a tremendous bite. The total payroll 
tax paid by an individual earning $25,000 per year and his employer is 
$3,825. This is several times greater than their income tax bill. For 
those who propose spending the Social Security tax surplus to enhance 
Social Security or Medicare benefits, it is worth noting that the 
lowest 40 percent of American earners pay more than 40 percent of the 
benefits for both Social Security and Part A Medicare. And those are 
the individuals must apt to be uninsured.
  Barrier No. 4 is the burden of debt.
  Consumer debt has a major impact on a household's ability to save. 
According to the latest SCF, households earning less than $25,000 
annually bear the most significant burden of debt compared to their 
income. The median ratio of debt payments to income among those earning 
less than $10,000 is 20.3 percent; among those earning $10,000 to 
$25,000, the ratio is 17.8 percent. In fact, 32 percent of those making 
less than $10,000 pay more than 40 percent of their income in debt 
payments, an increase of 16 percent since 1995. About 20 percent of 
those making between $10,000 and $25,000 devote more than 40 percent of 
their income to debt payments. Finally, 15.1 percent of households with 
less than $10,000 of income had debt payments 60 days past due--a 
doubling since 1995--which not only reflects an inability to keep up 
with debt payments but also contributes to bad credit and an inability 
to purchase a future home, etc.
  The Federal Government's publicly-held debt also has an indirect 
impact on the ability of workers to save. As a major borrower, the 
Federal Government increases interest rates. Higher interest rates 
lower private capital formation, which in turn hampers growth in 
productivity and living standards. In addition, higher interest rates 
on government debt translate into higher interest rates on mortgages, 
student loans, and credit card debt. When individuals pay higher 
interest rates, fewer resources are available for saving and investing.
  With all of these barriers to wealth accumulation, what can we, as 
lawmakers, do to eliminate these barriers? I believe the answer is 
twofold. We must create new savings incentives for low and moderate 
income workers and we must create a mandatory savings mechanism for all 
workers.
  A number of legislation initiatives have been offered to help low and 
income workers save. For years, Senator Lieberman has championed an 
effort to expand Individual Development Accounts beyond a pilot 
program. IDAs are a way to encourage lower income folks to save for the 
purchase of a home, the establishment of a business, or education.
  President Clinton has offered an interesting plan to get low and 
moderate income families to participate in employer pension plans 
through a government savings match program. While Senators Graham and 
Grassley and Representatives Portman and Cardin have offered 
comprehensive pension reform proposals designed to expand pension 
coverage among low income workers.
  I, along with a bipartisan group of Senate and House Members, have 
introduced a Social Security reform plan that allows workers to put a 
portion of their FICA tax dollars into individual savings accounts. Our 
plan also calls for an additional government savings match program for 
low income workers. In addition, our plan calls for opening mandatory 
savings accounts at birth through the KidSave program.
  What would this plan do? Fifty years from now we would have a much 
different wealth distribution situation in America. Men and women who 
today have no chance of accumulating real wealth would accumulate the 
kind of wealth that provides them with meaningful financial security. A 
new generation of Americans would be heading toward their retirement 
years less dependent on government transfers for health or income. If 
this plan were enacted, it would immediately change Americans' attitude 
towards saving on account of informing tens of millions of the power of 
compounding interest rates.
  Sadly, critics of this proposal to help low income workers acquire 
assets and share in the growth of the American economy too often 
misdescribe the impact. The key line that is used in opposition is: ``I 
am against privatization of Social Security.'' This line will usually 
produce a round of applause with senior groups who would not be 
affected by any of the proposals. Even sadder, these critics are also 
the same ones who prefer to merely offer solutions that include 
transferring more income and thereby increasing dependency on the 
Government. I do not believe proposals that merely transfer more income 
will solve the problem of inequitable distribution of wealth.
  Ownership of wealth is a much more reliable way of becoming 
financially secure in old age than promises by politicians to tax and 
transfer income. Ownership of wealth produces greater independence and 
happiness. The mal-distribution of wealth, the rich getting richer and 
the poor getting poorer, is not healthy for a liberal democracy and a 
free market economy such as ours. The costs of financing health and 
retirement income needs of the baby boom generation exceeds the tax 
paying capacity of the generations that follow them.
  So, Mr. President, after we have spent time debating the need to 
solve the problem of income inequality we need to turn to the matter of 
wealth inequality. And when we do we will quickly learn that we will 
not solve the problem of the rich getting richer and the poor getting 
poorer by beating up on the rich. We will solve the problem by lifting 
the poor out of poverty with programs that enable them to accumulate 
wealth in a variety of ways including modernizing and improving the 
Social Security program so that it becomes a means of saving money and 
a mechanism for transferring income.
  I yield the floor.
  The PRESIDING OFFICER. The Senator from Iowa.
  Mr. GRASSLEY. Mr. President, I yield 1 minute of my time to the 
Senator from Idaho.
  The PRESIDING OFFICER. The Senator from Idaho is recognized.

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