Dear Girlfriend:
As one of your viewers, it may be time to change the format of questions you ask during the “Can You Afford It” segment.
For those of you who don’t know, this is the segment when people contact Girlfriend to ask whether they can afford to buy a special item or experience, such as a vacation to France, a handbag, or a new car.
While the questions are sincere, and her advice is often off-base, they sometimes get a formulated response from the Girlfriend. This response invariably seeks to examine the caller’s expenses and assets as compared to whether they have an adequate rainy day fund, retirement account, or adequate insurance.
While these are essential pieces of information to formulate any serious financial plan, Orman often neglects to ask: “When was the last time you got a raise?”
Certainly, we all know the basics of any financial budget are income and expenses. While Orman focuses on expenses, the reality is that most Americans have not seen an increase in their real wages since the 1970s.
As noted in my book, “How 401(k) Fees Destroy Wealth and What Investors Can Do About It,” from 1979 to 2009, productivity grew by 80%, but the hourly wage only increased by 10%. Even then, all the wage growth happened from 1996 to 2002, reflecting the strong economic growth of the 1990s before the technology and Y2k crash of 1999 to 2000. And of special interest to Suze, the wages of women and minorities lagged behind the wage growth cited above.
Corporate Profits Don’t Go To Workers
More recently, U.S. corporations have enjoyed their profit levels between 11% to 14% (as measured against GDP), yet the percentage of profits going to employees has decreased to a 60-year low. As measured by GDP, the percentage paid to workers has fallen to 62% of GDP for total compensation, including benefits, and to 44% for cash wages and salaries. So for Girlfriend, this means more people could afford more if they got their fair share of company profits.
People could also afford more if the Girlfriend expanded her definition of “savings.” The common complaint by many conservative politicians and some in the financial services industry that people do not save enough is as political, as it is financially, motivated. The basic slant is that people cannot manage their money since they are too extravagant or ill-educated to be financially astute.
The better answer involves another missing component: people do not save enough because their investment returns are eroded by a combination of high fees in their 401(k) s and mutual funds and by low stock market returns.
This was the answer provided by Steward Neufeld, Ph.D., in a December 2011 article, “The Tyranny of Compounding Fees: Are Mutual Funds Bleeding Retirement Accounts Dry?” in the Journal of Financial Planning.
In the article, Neufeld states: “the problem of inadequate retirement savings exists not only because of low contribution levels by individuals but also low returns on the savings invested—a long-standing problem that has been largely ignored.
“The reasons for these low returns are varied, including poor investment decision making. However, a key factor is a poor performance relative to broad market indices delivered by mutual funds that manage fully half of the retirement savings. A considerable body of research has shown that a typical mutual fund underperforms its relevant benchmark index by approximately the amount of its fees levied and expenses incurred. The annual difference between the market return (for example, S&P 500) and that of the typical mutual fund may appear minor; however, the difference compounds over time and results in significant gaps between market returns and actual accumulation in retirement accounts.”
The Threat of Unemployment is Good For Inflation
So as millions of Americans cope with stagnant real wages, poor investment returns, and high fund fees, they also face the daily specter of being fired. While being unemployed sends chills through the workforce, it has the opposite effect on many economists. In 1997, then-Federal Reserve Board Chairman Alan Greenspan said when workers had poor job security they were more reluctant to ask for wage increases. If they did not ask for raises, it would reduce a major cause of inflation.
So for some conservative economists and policymakers, the best answer to the current wage stagnation and the high unemployment rate is to have more people asking the question: “Can I afford it?” And the more people who get denied, the better.
So maybe it’s time for Girlfriend to start asking the simple new question: “When was the last time you got a raise?” The answer should surprise millions of people.
