Growing Wealth Divide Driving Need for Alternative Financial Services
The Federal Reserve recently published findings from its Survey of Consumer Finances, a review of household finances and wealth conducted every 3 years. While the survey generally shows wealth nearing pre-recession levels, it does highlight a growing wealth gap between low- and high-income earners and between certain racial demographics. Understanding how this wealth gap affects household finances could be a key indicator of credit use and needs in the future.
In the last decade, the wage gap for low-income earners actually shrank between whites and non-whites, but the gap actually expanded between those groups in the middle class. Right now the median wealth for a white family is ten times more than the median wealth for a black family.
Further stressing the gap, family income for top earners is up 90% since 1963, but only up 10% for the lowest bracket of earners. The poorest 10% of families in America went from possessing about $0 in wealth in 1963 to now being about $1,000 in debt. Without substantial gains in wealth over the past 50 years, lower earners are struggling to save money over time. This conclusion closely mirrors another recent survey that found around 4 in 5 Americans live paycheck to paycheck.
The newly proposed tax plan currently being debated in Congress is unlikely to close the gap. The tax plan is purported to benefit older, wealthier Americans, leaving behind younger Americans with less time to build wealth. The top 1% of American are expected to receive more than 80% of the tax plan benefits over time. Proposed caps on retirement savings could hurt lower and middle income Americans attempts to build for their financial future.
Since the recession, real estate prices and the stock market have seen strong gains- two sectors that favor wealthier families. The Federal Reserve has done its part to get America back to “full employment,” but the Fed needs Congress to help return money from overseas to boost worker’s wages. To keep wage costs low, some employers are even limiting work hours right now. The gap can only expect to grow with limited hours and depressed wages.
So what are some of the consequences of the wage gap? At least for lower and middle income Americans, credit must fill the gap between available wealth and household needs. Consumer borrowing surged again in September, growing another $20.8 billion to a record total of $3.79 trillion.Total household debt now stands at an all-time high of $12.84 trillion.
Many of the same families that are being left behind as the wage gap grows are the same families woefully underserved by banks and traditional financial institutions. Responsible financial service providers, like the members of NAFSA who offer short term, online installment loans, have an opportunity to serve the underserved credit community and help soften the blow of a financial policy that seems to be overlooking the vast majority of American families.