Why the Richest Americans Could Be Set Up for Disaster

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Let's face it: We'd all like to own a private jet, get driven around by chauffeurs in rare automobiles, eat at the priciest restaurants, and in essence never worry about money again. I'd speculate for more than 99% of us, this is just an aspiration, but for some of the wealthiest Americans in the United States, this is their everyday life.

Source: Elaine & Priscilla Chan, Wikimedia Commons.

A common misconception about the rich is that many were born into wealth. On the contrary, many of the wealthiest individuals in the world -- or at least the ones most commonly in the spotlight -- have earned their fortune, including Berkshire Hathaway's  (NYSE: BRK-B  ) CEO Warren Buffett, who, through disciplined investing, has built his company into the 58-subsidiary-strong conglomerate that it is today. Facebook CEO Mark Zuckerberg is another prime example of a self-made billionaire, building Facebook from the ground up through partnerships and hard work. In short, it may not seem fair for someone to possess such a disproportionate amount of money relative to the average working-class citizen, but in more cases than not, they've earned it through hard work and/or smart investments.

However, according to a report out earlier this week by The New York Times, that disproportionate wealth relative to the working class may be at far greater risk than many of the richest Americans realize.

Surprise, surprise: The rich got richer
According to The New York Times' report, three factors have contributed to a surge in income among the United States' wealthiest individuals. First, a gigantic rebound in the stock market from its March 2009 lows have boosted the overall wealth of America's richest individuals. Just for comparative purposes, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) and broad-based S&P 500 (SNPINDEX: ^GSPC  ) have bounced 134% and 149%, respectively, since their lows four and a half years ago. As of 2011, the top 1% of income earners in America owned about half of the United States' stocks, bonds, and mutual funds, as compared with the bottom 50% of Americans, whp own just 0.5% of these investments. Expanding that even further, the top 10% of households own 90% of all stocks in the United States! As the markets continue to march higher, so does the wealth of our nation's top income earners.

The second source of growing income for the United States' wealthiest individuals is real estate. Home prices are on the rebound thanks to rapidly shrinking new and foreclosed housing inventories and historically low lending rates, which have spurred new home buying as well as investment-oriented borrowing and purchasing. According to Forbes in 2012, of the then 425 worldwide billionaires, 27 of them were made because of real estate investments. As of the latest Case-Shiller Index report, which is a measure of home prices in 20 of the United States' largest cities, home prices between June 2012 and June 2013 had risen by 12.1%, putting a good chunk of change directly into the pockets of the United States' richest individuals.

Finally, favorable tax code helped out the rich in 2012, with the U.S. government deciding not to roll back all of the Bush-era tax cuts on the wealthy. This isn't to say that the United States' wealthiest individuals aren't paying their fair share so much as it points out that they aren't paying nearly as much as everyone expects they should.

Added together, these three factors allowed the top 1% of income earners to accumulate 22.5% of all U.S. income in 2012, with the more expansive top 10% of income earners accounting for better than 50% of all income last year -- the highest level in 100 years of record-keeping. To put it another way, the rich just keep getting richer.

But that trend looks as if it could come to a grinding halt. Here's why.

The coming disaster for America's wealthiest individuals
For one, with the wealthiest individuals controlling a vast majority of stock, bond, and mutual fund investments in this country, they're at the greatest risk of wealth depreciation if the U.S. economy stalls. Given this week's initial jobless claims figure, which came in at a seven-year low, that might seem highly unlikely, but I'd beg to differ.

It's been my stance all along that the Dow and S&P 500 are rallying, but for all the wrong reasons. One in particular has been an improving jobs market.

I certainly can't deny that unemployment has been on a steady decline for years now, which you have to think would bode well for consumer spending and worker productivity. The reality is that in 2013 about three-quarters of jobs created have been part-time in nature. Whether it's from the upcoming implementation of the Patient Protection and Affordable Care Act, also known as Obamacare, which has corporations cutting workers' hours to free themselves from any chance of being penalized for not providing health-insurance options to its full-time employees, or simply tight corporate wallets, the labor picture isn't as sound as it appears.

The labor force participation rate at a new 35-year low should also be a concern for all investors.

Source: Bureau of Labor Statistics. 

Some people do drop out of the workforce to go back to college or retire, but I have to believe we're still a long way away from seeing a big baby boomer-induced retirement surge. Instead, I'd propose that with the majority of jobs available being part-time in nature and the median unemployment stint still ranging close to 37 weeks, unemployed workers are simply too discouraged to keep looking for work and are dropping out of the labor force participation calculation.

The housing market isn't in any better shape
Another concern that wealthy investors have to have front and center is what will happen to the Dow and S&P 500, as well as the housing sector, once the Federal Reserve begins to pare back its monthly bond-buying program known as QE3. This easy money program has been largely credited with keeping lending rates at historic lows and buoying a struggling housing industry.

However, once QE3 begins to be wound down, there's a strong possibility that lending rates may reverse a multi-decade downtrend and head higher. Ever since the Fed hinted at the possibility of tapering QE3 back in early May, 30-year mortgage rates have risen by roughly 120 basis points, and mortgage applications, which include refinancing and new home loans, have fallen by a whopping 59%! The American consumer has been spoiled with years of low lending rates and simply isn't going to bite in great numbers at a rate of 4.5% or higher on a 30-year mortgage, even though we're still well below the historical average.

If you think I'm making a big fuss about nothing, then just look at the recent layoffs in the mortgage divisions at some of our nation's largest banks for confirmation of this trend. Bank of America (NYSE: BAC  ) announced earlier this week that it plans to lay off 2,100 people from its mortgage division as higher interest rates crush refinancing activity. But B of A isn't alone. Wells Fargo (NYSE: WFC  ) announced last month that it, too, will jettison 2,300 mortgage segment jobs in lieu of slowing originations activity.

Home prices may be going up at the moment, but if no one is purchasing homes or refinancing existing homes, banks and the housing sector could be in trouble fairly quickly no matter how tightly the homebuilding industry controls its inventory.

Source: Philip Taylor, Flickr.

The taxman will cometh
In 2012, the United States' wealthiest individuals enjoyed numerous tax breaks. Beginning this year and moving forward, they won't have nearly the same luxury.

Obamacare, for instance, adds extra taxation on upper-income earners to help pay for the upcoming Medicaid expansion that will bring insurance to some 16 million currently uninsured individuals over the next decade. This will be accomplished by a 3.8% tax on investment and dividend income for individuals who earn more than $200,000 in adjusted-gross income in a year (or married couples with more than $250,000 in AGI). There is also a 0.9% health-care tax on upper income earners.

Other tax-code changes that have been employed include a higher tax on dividends for upper-income earners (20% as opposed to 15%), and a sizable bump in personal income tax for the nation's wealthiest individuals to as high as 39.6%! Higher taxes are bound to take a bite out of these individuals' pocketbooks.

It could happen again
During the recession, the top 1% saw their incomes plunge by 36%, while the remaining 99% saw their incomes dip by just 12%. The difference has been that, since the recession, the top 1% have seen their incomes rise by 31%, compared with a paltry 1% gain for the remaining 99%! It's quite possible that the rich could be again on the precipice of a major decline in income. Obviously it would take all of the factors I've mentioned for this to happen, but the ideas I propose aren't as far-fetched as you might surmise. With their wealth concentrated in the U.S. stock market and in real estate, it wouldn't take a huge decline to have a big impact on the pocketbooks of the United States' wealthiest individuals.

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Read/Post Comments (11) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 14, 2013, at 6:10 PM, captaintodzilla wrote:

    Doing the same thing over and over is insane. Fix America First. Prioritize , a good example is the best teacher. Recycle America. Create Accountability. Build a new Society before retiring the old decrepit one we have now. Build a new Government before retiring the old decrepit one we have now. Build a new Economy before retiring the old decrepit one we have now. Build a new Educational System before retiring the old decrepit one we have now. Build a new Judicial System before retiring the old decrepit one we have now. build new bridges and a new electrical grid ,prioritize people family and children ......turn things around......provide jobs completing the above task.....take the elites jobs and money they have done it to the working class. build a good foundation then rebuild. reinstate common sense. create accountability. and most of all treat our cancers greed , ignorance and self-entitlement. exile our prisoners and bring back labor camps so our prisoners make us money or at least don't cost us any. secure our borders . invest in our children and education more than politics. I would use morals and common sense good leadership and with gods help I would do it with the strength of the people of the USA. I would arrest thief's and thugs not granny's smoking weed.(meaning prioritize) there are so many simple solutions to our problems but so many master debaters. GREED IGNORANCE AND SELF-ENTITLEMENT ARE THE CANCERS KILLING OUR SOCIETY all the other #$%$ slewn by the media and politicians and churches are the things they use to keep your attention elsewhere like a magicians slight of hand while you focus on their shenanigans your children and your children's children are being exploited for the 1%'s benefit because our society works well for them and they can afford to keep it that way. if they want change FIX AMERICA FIRST. its simple to do for the rich. get a Honest President to declare ww3 so they cant get rid of him before his changes take hold. go to war against GREED , IGNORANCE, SELF-ENTITLEMENT, AND POLITICAL CORRECTNESS send our prisoners off to countries were at war with not our children. use our military as a border. change the charity margins so 70% goes to the charity and 30% go to the fundraisers (opposite of how it is now) invest in our children more than our prisoners. make all public office wages same as minimum wage. cap profit margins in America I don't like paying for the mistakes of others. gas prices went up after the bp oil spill because they wanted to recover their losses. our society runs the way it does because it is designed that way for the rich by the rich. their are many common sense simple ways to change things to make a better world to live in. legalize marijuana god made it man banned it, the rich cotton farmers were afraid of the hemp industry would make them poor. legalize prostitution maybe less children will get abducted. until we can prioritize correctly , have accountability , and worry about the American instead of the American dollar things will remain perverted. Anyone can find fault -- it's not a sign of anything other than moderate brain activity. It's much harder to offer creative criticism that actually improves the situation for everyone involved UNITED we stand divided we fall...there is only one race the HUMAN RACE all the divisions of political parties and skin color have demoralized this country into a sewage plant of lying stealing ignorant greedy self-entitled hypocritical idiots the government has had too much money power and time with too little results actions speak louder than words. vote Todd Higgins for president I would use common sense and high morals.

  • Report this Comment On September 14, 2013, at 6:26 PM, wfo75080 wrote:

    The rich didn't get where they are by being stupid.

    Smart investors know where they have to pay taxes and invest other places. Smart investors can make money if the market goes up or down.

  • Report this Comment On September 14, 2013, at 6:48 PM, GoldenEagle51 wrote:

    Sorry to say, but the job market will never come back! In fact the stock market will continue to propel to new heights because Major Companies have relied "heavily" on new technology in the workplace, over hiring. I also believe that the great recession was the best thing that ever happened to Major Corporations because new technology has been rapidly implemented into the new workplace into areas of the Corporations that new manpower is not needed, and the current manpower in place will be required to do more with less for the "way" foreseeable future. And the bottom line for the Corps.."bigger profits"

  • Report this Comment On September 14, 2013, at 7:30 PM, SSBN620 wrote:

    As an average small employer trying to make ends meet, I'd like to comment on the jobs outlook. I need semi-skilled labor, but cannot find very many qualified people who will work at a wage my market will bear.. The parade of unskilled trainees I have attempted to employ want a paycheck, but don't like hard work. They get an attitude because they can make more on welfare than they can earn from me working full time at entry level wages. As long as unemployment pays what it does at present, I just don't see things improving at all.

  • Report this Comment On September 14, 2013, at 9:38 PM, Hypochondriac wrote:

    SSBN620, accepting a wage is a serious commitment and any employee owes it to themselves to find the highest wage they can receive for their labor. Your contempt for potential employees is much more outrageous than their attitude at the pay being offered, as you probably wasted more of their time than they wasted yours. Maybe if you listed the wage in the advertisement you wouldn't have to worry about people following up, and finding what you're offering insufficient.

  • Report this Comment On September 14, 2013, at 9:41 PM, Hypochondriac wrote:

    "A common misconception about the rich is that many were born into wealth. On the contrary, many of the wealthiest individuals in the world -- or at least the ones most commonly in the spotlight -- have earned their fortune"

    I don't consider two anecdotes sufficient evidence for this sweeping claim. Also, how the second sentence "contrary" to the first? Both can be true.

  • Report this Comment On September 15, 2013, at 4:09 AM, DirtySock wrote:

    Eventually they will have ALL the money, then what? What do they seek to acquire next? See, they have this huge hole in them that they try to fill with things and money and there are not enough things or money in the world to fill those voids.

    They can have it all, I already have everything that is important, and it didn't cost a single cent. All that money...doesn't mean a thing.

  • Report this Comment On September 15, 2013, at 7:52 AM, peopleareidiots wrote:

    "...hard work and/or smart investments."? Oh brother, what idiot wrote THIS pile of crap? The ONLY way to start at the bottom and become wealthy is to have the support systems that make it POSSIBLE to achieve success. To grow up with people around you that support that mindset. That don't have circumstances in their life, mental or physical health issues that set up near insurmountable road blocks. They're people that aren't burdened by learning disabilities. There is a LOT more to the equation than just being in a position to be able to save and make the right investments! There IS a severe elitist attitude in this country. Even if you don't ascribe to the idea that only 1% of the people in this country hold 99% of the country's wealth...even if you believe that it's more like you ACTUALLY believe that half or 150 MILLION people aren't rich simply because they're just 'lazy'?? Seriously? Half the population LIKE not being able to have healthcare? If that's truly what you believe...then why aren't YOU a mufti-BILLIONAIRE?? You MUST just be...lazy.

  • Report this Comment On September 15, 2013, at 7:58 AM, sftv wrote:

    The rich got rich because they inherited it, embezzled it, or flat out ripped somebody off for it. The quote above on Zuckerberg starting with nothing. What BS, he freaking went to Harvard, Had the money to go there and a financially well off family, he screwed his original partners 'the twins' whose Idea it was in the first place. Jobs started Apple with $25,000 from his wealthy parents. That's not starting with "nothing". Tax the crap out of them and nationalize the banks, oil, water and power companies. These companies use the natural resources of the U.S. and are essential to the security of the country. Efff them all.

  • Report this Comment On September 15, 2013, at 10:57 AM, Burstedbladder wrote:

    -and the point of this story is about? BS!

    They got rich with the right connections. Ripping people off and taking advantage of the system that give them all their tax breaks.

  • Report this Comment On September 15, 2013, at 12:51 PM, todamo13 wrote:

    Unfortunately, the best investments the 1% make are in buying our politicians. Huge returns (in tax breaks, rich welfare, and subsidies) on small investments (in campaign donations).

    Our privately-funded political system, combined with the monstrosity Supreme Court ruling in Citizens United (allowing unlimited campaign spending by rich and corporations) requires politicians to have rich patrons in order to find the funding to wage multi-million and multi-billion dollar election campaigns.

    The end result is that politicians owe their patrons and end up representing them over the rest of us who simply vote. Politicians also have to spend a large portion of their time simply fundraising, rather than doing their jobs.

    We have to get a publicly-funded, equal playing field for electing politicians, so that politicians start representing the 99% instead of corporate and 1% donors. Until that happens, we can talk all we want but nothing will change.

    There is a growing movement to repeal Citizens United, and fix our legalized-bribery-based political system with an amendment to the Constitution. We can fix this if we really want to!

    Here is a leading effort in this movement:

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