Wealth gap widens
Chasm between wealthiest households and everyone else has grown more than 50% since the early 1960s.
By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Over the past 40 years, those at the top of the money food chain have seen their wealth grow at a rate far outpacing everyone else, according to a new analysis released by the Economic Policy Institute, a liberal research group.

In the early 1960s, the top 1 percent of households in terms of net worth held 125 times the median wealth in the United States. Today, that gap has grown to 190 times.

The top 20 percent of wealth-holding households, meanwhile, held 15 times the overall median wealth in the early 1960s. By 2004, that gap had grown to 23 times.

"In 21st century America, wealth begets wealth, and those without wealth find it farther out of reach," the report's authors write.

The EPI analysis also found that stock ownership is not widely spread across wealth groups.

In 2004, 48.6 percent of households owned some stock, including equity mutual funds in 401(k) accounts. But only 35 percent of stock-owning households had more than $5,000 in stock. The average value of stock holdings was just $7,500 among the middle 20 percent of households and just $1,400 for the bottom 40 percent. By contrast, the wealthiest 1 percent of households owned an average of $3.3 million.

Non-stock assets - the biggest of which is housing - rose for all wealth groups since 2001 thanks to a strong housing boom. But while housing is a staple of middle class households, home equity was most concentrated in higher net worth households. The top 20 percent held 65.4 percent of total housing equity.

The one area where middle and lower net worth households trumped the wealthiest was debt. Debt levels rose for all groups, exceeding disposable personal income by more than 30 percent in 2005, according to EPI. But debt for the top 1 percent only rose 10.6 percent compared to a 19.5 percent increase among the middle 20 percent of households and a 28.2 percent jump for the next 20 percent.

What the data don't show

What the EPI analysis does not reflect are the demographic changes over the past 40 years that may skew the income and wealth distribution, said tax policy analyst Chris Edwards of the libertarian Cato Institute.

For instance, he noted, the rise in dual-income couples may mean more households in the upper income ranks than during the 1960s, when one-earner married couples were more prevalent. Conversely, an increased divorce rate can mean more middle- or lower-income households as former spouses set up two homes.

Moreover, the EPI analysis counts 401(k) assets in net worth calculations but not the value of defined benefit pensions, since workers don't legally own them as assets. Given the decline in pension benefits in the past 15 years, if pensions were included there may have been a widening of the wealth gap, said New York University economist Edward N. Wolff, who analyzed data for the EPI report.

Is the wealth gap a problem?

That a wealth gap exists isn't necessarily a bad thing. If there were no gap at all there would be no incentive to work, said Cornell University economist Robert Frank.

And that there is growth in the wealth gap isn't necessarily a concern if wage growth at the middle and bottom is high enough to match productivity gains because workers feel they are getting back what they put into the economy.

That occurred in the late 1990s - but not during the past several years, according EPI economist Jared Bernstein. That puts more of a squeeze on middle- and lower-income workers, who will have a harder time accumulating assets.

Factors such as technology are likely to keep the gap wide going forward, says Frank, coauthor of the book "Winner Take All Society." In today's mass markets, even small innovations can reward the talented few much more greatly than the majority. For example, the vision and aptitude of Bill Gates or other entrepreneurs can't be trained, and the rewards of their talents are magnified by globalization.

One of the ways to narrow the gap a bit, Bernstein and Frank suggest, is to raise tax rates on upper-income tax payers. That, they argue, would raise more tax revenue and help to stem budget cuts to programs that benefit middle and low income groups as well as public services.

Edwards at Cato contends that middle and lower income households also enjoy tax advantages through savings vehicles such as the Roth IRA and 401(k), and home owners in all wealth groups benefit from a capital gains exemption when they sell their homes. Moreover, he says, faster growth at the top can mean more economic growth long-term since the wealthiest often fund innovation by investing in risky start-ups.

Critics counter, however, that raising contribution limits on tax-advantaged savings accounts is not a tax break most can enjoy since so few feel able to contribute the maximum. And while they applaud the fact that the saver's credit was made permanent -- the break offers a tax credit to low-income retirement savers -- they contend that it should also extend to middle-income families as well.

Edward Lorenzen, policy director at the Concord Coalition, a nonpartisan fiscal watchdog that advocates deficit reduction, said that in the short term faster growth at the top can boost tax revenues since more income is created for taxpayers subject to the highest tax rates.

But long-term if more people in the middle and low-income groups have insufficient income and savings to keep pace with costs and emergencies that can bring more pressure to bear on programs like Social Security and Medicaid, which can make deficit reduction that much more painful in the future.

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