America, Welcome to the Poorhouse This page intentionally left blank America, Welcome to the Poorhouse W Y M D P Y HAT OU UST O TO ROTECT OUR F F R W N INANCIAL UTURE AND THE EFORM E EED J W ANE HITE Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jim Boyd Editorial Assistant: Pamela Boland Development Editor: Russ Hall Operations Manager: Gina Kanouse Digital Marketing Manager: Julie Phifer Publicity Manager: Laura Czaja Assistant Marketing Manager: Megan Colvin Cover Designer: Alan Clements Managing Editor: Kristy Hart Project Editor: Lori Lyons Copy Editor: Cheri Clark Proofreader: Kay Hoskin Indexer: Angela Martin Compositor: Jake McFarland Manufacturing Buyer: Dan Uhrig ©2010 by Jane White Publishing as FT Press Upper Saddle River, New Jersey 07458 This book is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services or advice by publishing this book. Each individual situation is unique. Thus, if legal or financial advice or other expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evaluat- ed carefully and appropriately. The author and the publisher disclaim any liability, loss, or risk resulting directly or indirectly, from the use or application of any of the con- tents of this book. FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800- 382-3419, [email protected]. For sales outside the U.S., please contact International Sales at [email protected]. Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners. All rights reserved. No part of this book may be reproduced, in any form or by any means, with- out permission in writing from the publisher. Printed in the United States of America First Printing September 2009 ISBN-10: 0-13-702017-1 ISBN-13: 978-0-13-702017-1 Pearson Education LTD. Pearson Education Australia PTY, Limited. Pearson Education Singapore, Pte. Ltd. Pearson Education North Asia, Ltd. Pearson Education Canada, Ltd. Pearson Educatión de Mexico, S.A. de C.V. Pearson Education—Japan Pearson Education Malaysia, Pte. Ltd. Library of Congress Cataloging-in-Publication Data White, Jane, 1948- America, welcome to the poorhouse : what you must do to protect your financial future and the reform we need / Jane White. p. cm. ISBN 978-0-13-702017-1 (hbk. : alk. paper) 1. Retirement income—United States—Planning. 2. Finance, Personal—United States. 3. Finance—Government policy—United States. I. Title. HG179.W5229 2009 332.02400973—dc22 2009023705 Contents Introduction . . . . . . . . . . . . . . . . . . . .1 Part I 80% of Americans Can’t Afford to Retire Chapter 1 Why You Can’t Retire from a 401(k) Plan: You Won’t Have Ten Times Your Salary in Your Account at Age 65 . . . . . . . . . . . . .9 Chapter 2 How to Save Wisely Until We Get 401(k) Reform and How to Make Reform Happen . .35 Part II How the American Dream Turned into a Nightmare Chapter 3 The Mortgage Mess: It Ain’t Just Subprime— It’s Half of Americans in Overpriced Homes . .55 Chapter 4 How Laws Protect Banks, Not Borrowers, and the Reform We Need . . . . . . . . . . . .67 Chapter 5 The Fix: Refinance to a Fixed-Rate Mortgage; Move to an Affordable Region . . . . . . . . .81 Part III College Is Unaffordable When the Majority of Americans Need Degrees Chapter 6 Why We Need More College Graduates to Compete with China and India . . . . . . . .105 Chapter 7 How Sallie Mae Lobbied Congress and “Enticed” Colleges to Offer Its Loans . . . .115 AMERICA, WELCOME TO THE POORHOUSE Chapter 8 The Fix: Grants, Government Loans, and Colleges That Are Free . . . . . . . . . . . .129 Part IV 35 Million Americans Are Drowning in Credit Card Debt Chapter 9 How Credit Card Debt, Home Equity Loans Get You Over Your Head in Debt . . .141 Chapter 10 The Fix: How to Get Out of Credit Card Debtor’s Prison . . . . . . . . . . . . . . . .151 Part V Real Campaign Reform That Puts Citizens, Not the Business Lobby, First Chapter 11 How Big Business Owns Both Political Parties . . . . . . . . . . . . . . . . . . . . .167 Chapter 12 The Fix: Replacing Corrupt Politicians with Ones Who Work for Taxpayers . . . . . . . .177 Conclusion The Big Fix: Recruit the Smartest Workers from Around the World, Send Most Kids to College, Measure Household Wealth . . . . . . . . . .191 Endnotes . . . . . . . . . . . . . . . . . . . .205 Index . . . . . . . . . . . . . . . . . . . . . .237 vi Acknowledgments When you write a book, you’re “dependent on the kindness of strangers”—or people who know you and don’t mind lending a hand. I couldn’t have written this book without the input of the follow- ing people, in alphabetical order: Ginna Green, Keith Gumbinger, Bill Karbon, Judy Kennedy, Fred Reish, Massie Rich, Luke Swarthout, and James Turpin. Thanks to Mark Zandi from Moody’s Economy.com for access to his great research. And last, but definitely not least, thanks to Jim Boyd for being a great editor. vii About the Author Jane Whiteis Founder and President of Retirement Solutions, LLC, which promotes 401(k) reform and provides investment education. In 2007, at the U.S. Department of Labor’s invitation, White presented recommended 401(k) contribution rates to the ERISA Advisory Council. As a result of White’s testimony, the Working Group on Financial Literacy recommended that the DOL “encourage plan communication that uses income replacement formulas and final pay multiples.” A Congressionally appointed delegate to the 2002 National Summit on Retirement Savings, White first observed the 401(k) savings crisis in 1993 as associate editor of Standard & Poor’s Your Financial Future, distributed to half a million 401(k) partici- pants. A former syndicated personal finance columnist for Gannett News Service, White first observed the housing bubble and the risk of adjustable rate mortgages in her 1991 book, The Cost Conscious Homebuyer’s Guide. Her articles have appeared in The New York Times, Barron’s, and Employee Benefit News. viii Introduction Are You Better Off Than You Were as a Kid? The nationally broadcast debate in 1980 between President Jimmy Carter and would-be President Ronald Reagan was summed up in 10 short words: “Are you better off than you were four years ago?” For Carter, the situation was dire. Iranian radicals had held 52 American hostages for nearly a year. The economy had nose-dived while inflation skyrocketed. Nothing Carter said could counter Reagan’s rhetorical question. It was Reagan’s debate and a week later it was Reagan’s election. Today if you ask yourself, “Am I better off than I was growing up?” the answer may very well be no. This time it’s not a war or hyper- inflation that’s threatening America (although we’re still paying through the nose for gasoline prices), but financial stress. Despite the fact that many Americans may appear to be wealthy, too many have been “living on leverage”—over their heads in debt— unless they’ve got “chief” and “officer” in their job titles because most of what they own is paid for with borrowed money—whether it’s cred- it card debt or home equity loans—not with rising wages. While in 1980 the average CEO wage was 42 times that of the average worker, in 2008 it was 208 times, averaging $7.7 million.At the same time, the average weekly earnings for Americans has actually decreased in the past 30 years, from more than $325 in the early 1970s to about $280 in 2005(in 1982 dollars). In March of 2009 a poll by CNN Opinion Research Corp. showed that only 39% of respondents thought they’d be able to keep up their quality of life—down from 45% the previous year. Only 50% 1