Home > Uncategorized > I Love you Mathbabe, but 529 Plans are Awesome.

I Love you Mathbabe, but 529 Plans are Awesome.

February 5, 2015

This is a guest post by FogOfWar, who disagrees with me about 529 plans and my plan to make paying for college harder.

I’m catching up on the 529 kerfuffle. First observation: this made a massively outsized splash in public perception compared to what one would expect from a technical tax provision, which (more on this later) has a budgetary impact within a 5% confidence interval of $0.

Second observation: my good friend Cathy, who has kids mind you, is arguing against the 529 plan. Huh? When did we enter the Twilight Zone? Beating up on 529 plans is like stealing oatmeal from orphans—they’re too small to defend themselves, you don’t really get much if you win and everyone loves the soot- smudged little munchkins.

So here is what may be patient zero: this GAO Report released in 2012. The headlines read right into the talking points people are quoting. If you’re going to read it, try an interesting thought experiment: mentally substitute “401(k)” for “529” and “saving for retirement” for “saving for college” everywhere you see it. That’s not a completely fair analogy, but neither is it completely unfair…

Also, right at the beginning of the report, there’s an interesting omission. It’s in the “who did we talk with to figure out what was going on here?” section. Not that the report did a bad job, but why didn’t they talk to the AICPA (the national organization of CPAs)? These are the people who are most commonly on the ground talking to clients (rich and poor alike) about whether a 529 plan makes sense for them. I think you’d get a slightly different focus in the report with this on the ground perspective.

529 Plans Work Really Well for Everyone but the Very Rich and the Actually Poor

You can define ‘rich and poor’ in a hundred different ways, so let’s pick 4 examples in a semi-arbitrary manner. All couples are two parents and 1 kid who is 3, and all live in NYC. Couple 1 (“poor”) earned $20,000 last year; Couple 2 (“middle class”) earned $75,000 last year; Couple 3 (“mass affluent”, or “the bottom 1% of the top 1%”) earned $250,000 last year and Couple 4 (“rich”) earned $3-5m last year. Each couple has $100.00 of extra funds and is deciding what to do with it.

Important note: that’s not “$100x” as code for $100,000.00, that’s really $100.00.

Everything we’re talking about here is downwardly scalable and transaction costs are minimal (the cost of a stamp or time to set up direct deposit/withdrawal). All the couples have student loans, which are charging them 5%. Assume a stable long term low-risk portfolio also returns 5% (this is a side debate, but for those wanting to make it higher, I’d say you should consider your returns on a risk-adjusted basis).

Each couple has 3 rough choices, A: contribute the $100.00 to a 529 for kids, B: invest the $100.00 outside the 529 plan for kids, C: pay down $100.00 of student loans.

Poor Couple: Well, these guys get no state tax advantage from making the initial 529 contribution, and given their tax rate, the compounding on the 529 earnings has a negligible tax impact. Plus they’re giving up liquidity, which has more value in their hands than it does in the higher income cohort. Not only that, but I believe (chime in if you know this for sure) that moving the $100.00 from parent’s account to 529 account moves the asset from “parent asset” to “child’s asset” on many (but not all) needs-based financial aid forms. In short, the 529 plan is a terrible idea for this couple.

The real question is whether they should pay down the student loans or invest the $100.00 outside. That question is more subtle, but the availability of the student-loan interest deduction (lower after-tax return on debt paydown) and liquidity considerations makes $100.00 outside investment the likely best option.

Basically the tax code (this portion) combined with student aid gives no incentive for this couple to save and maybe a disincentive (or maybe an incentive to buy physical silver and not declare it on fin aid forms).

Middle Class Couple: At $75,000 the couple is still getting the tax shield for their student loans. So, at a combined Federal/State rate approaching 25% (NYC is a very high-tax place to live), their ROI (Return On Investment) from paying down student loan debt will be only 3.75%, compounding. So cash in pocket of $3.75 in year 1, $3.89 in year 2, etc. Their return on outside investment is sorta the same, with a big caveat. It’s all in the taxes. If middle class couple is invested in mutual funds or bonds, then yes, it’s $3.75 in year 1, $3.89 in year 2, etc. If Middle Class Couple is tax smart, they’ll invest only in low-dividend/high-growth stocks that will compound over the next 15 years before being cashed out to pay for kid’s college. In this case, the taxes are much, much lower—not zero, but much closer.

Doing some quick math: if the $5 in appreciation is going to be taxed at 20% capital gains 15 years from today, that makes the current tax cost = ($5.00*20%)/(1+0.05)^15 or $0.48. So year 1 the stock investment gains $4.52 compared to $3.75 from paying down student loans.

That’s not the full analysis, however, as (i) that difference compounds over the next 15 years, and (ii) the compounding is on $5.00, not $3.75, so it’s even more powerful. Run a quick spreadsheet and the student loan deduction compounds to $173.70 over 15 years and the stock investment runs to $186.31 after cash-out capial gains. Note that I’m assuming that student debt “savings” are reinvested in additional paydowns of student debt (somewhat for simplicity).

There’s a more subtle point as well: income is dynamic, not static, and thus tax brackets and availability of tax benefits is not locked in. If their income increases over time (as is very likely to happen statistically), they may knock themselves out of the deductibility of the student loan interest, which would cut back to paying down debt. OTOH, liquidity concerns (which are hard to reduce to a single dollar value but are extremely important) push towards the stock investment. Complicated analysis and everything above should be the starting point not the ending point if you’re looking at this choice in real life.

Now let’s add 529 Plans to the mix. Because the couple is NYC resident, they get an immediate tax advantage of $10 cash-in pocket state tax advantage (this assumes no itemizing, which is just over the cusp of reasonable given the numbers). The compounding is 100% tax free, either now or on distribution, so right away the earnings are $5.00 in year 1, compared to $4.52 and $3.75 for the other two options.

But that’s not all: the $10 in pocket is also invested—let’s assume in 5% stock investments, as above, so there’s an additional $0.45 return on that, making the 529 earnings in year one a Patriots four-time superbowl championship winner at $5.45. Not only that, but the benefit compounds over time, so the 15-year return is $226.52, all in. 30% higher than paying off student debt on an after-tax basis.

Liquidity is still a concern, although 529 plans have more liquidity than paying off student debt (b/c of ‘wrong way risk’ but that’s another discussion)—you can at least get at the money, but you have to pay a 10% penalty. Also, all of these numbers get much more dramatic if you assume investment in the stock market at a 10% rate of return over time, rather than the more conservative 5% rate of return I’ve worked with. Also, if you factor in dynamic tax rates the 529 becomes even more attractive, as the tax cut from investment income gets higher in the out years.

Takeaway? The 529 plan is an extremely powerful tool for the true working class.

Second Takeaway: running some quick numbers, about 46% of the benefit over the ‘buy and hold stocks’ strategy here is from the state tax advantage and 70% is from the federal compounding and exemption on distribution of profits. If this couple has the misfortune to move to a state that doesn’t seem to care about the middle class saving for college, like, let’s say…Massachusetts or California (neither of which give a state tax advantage for 529 contributions), the 15 year return drops down from $226.52 to $207.89. Still not bad, but the state incentives are a huge part of the practical analysis. Note also, that anyone living in a state without an income tax (Texas, Florida) gets no state income tax advantage because there ain’t any state income tax to take the deduction against!

Mass Affluent Couple: Whew, that was a lot of ink on the middle class couple, and if you’re in the Mass Affluent income cohort and reading this for practical advice, go back and read the numerical analysis of the middle class closely, because with a few modifications it’s going to apply to you as well.

Before that, though, let me say that there’s been a lot of progressive spite (not sure what adjective to use here) thrown at this couple. Cries of “they really don’t need any help—we should take this away” are there either explicitly or just below the surface. Some of my best friends are mass affluent couples in NYC, and I will tell you that the cost of college is something that gives them grey hairs. It’s enough money to be able to pay for college, yes, but not as easily as it might look from the outside.

Plus, and maybe most importantly, earnings now are not a guarantee of earnings for the next 15 years. You’re free to say “cry me a river”, but these are people, and all they want is the best for their children and to villainise them for such doesn’t sit well with me. Also, as we said before, the state tax benefit is close to ½ of the total 529 benefit, and that benefit is capped out in NY at $5,000 per parent per year, so this isn’t reducing anyone’s state tax bill to $0.

OK, here are the numbers: paying off student debt is actually more attractive for this couple because they earn too much money to get the income tax deduction, which, by the way, now stands at 43% combined state & federal (I’m assuming, not unreasonably, that this couple are AMT taxpayers). So $100.00 paying down student debt compounds at the full $5.00 ending up at a full $207.89 at the end of year 15. Not too bad, and liquidity is sacrificed, which is still important, but probably less important for this couple than the others.

Investing on the side, even if done in a tax efficient manner yields only $186.31 after 15 years (I upped the capital gains rate to 25% to reflect higher taxes—this gets a little more messy in real life but it’s a decent approximation). Hmmm…

Takeaway: Mass Affluent couple is better off paying away their student debts than investing in the stock market, given our mathematical assumptions (and, critically, on a risk-adjusted basis).

What about 529 plans? Well, the 529 plan still yields $226.52. Definitely better than paying off student debt (and that investment opportunity doesn’t even exist after all debt is paid off).

Interestingly 100% of the benefit in that comparison is now state level. Let me say that again: for well off taxpayers who still have student loans, the federal tax advantage is in some ways $0 and the advantage is all at the state level.

Interesting observation, given that many of the cries were for Obama to remove this great federal incentive in 529 plans (neither Obama nor the US Congress has any input on what states decide to do with 529 tax treatment).

Takeaway: The well-off/upper middle class/mass affluent/merely wealthy/whatever you want to label them get some advantage from 529 plans, but mostly from the state level & that really has nothing to do with Obama one way or another.

The Rich Couple: Nothing we’ve talked about matters at all. For reasons I won’t get into, anyone earning this level of income who is contributing to 529 plans should chew out their tax planner and/or financial advisor. There are a few situations where they make sense, but usually 529s are an unbelievably sub-optimal use of your annual gift tax exclusion.

Takeaway: 529 plans aren’t relevant to the rich at all. They’re glad you’re spending your time thinking about 529 taxation rather than something that matters, like carried interest or the step up in basis at death…

OK, that’s great, but what about Cathy’s point?

Oh, right. Well, yes—when you subsidize an asset the price generally increases to at least some degree (there’s all sorts of complicated analysis on relative elasticity here), and in theory that impact of the 529 is hosing the poor at the expense of the middle class and upper middle class (and the rich, sortof/maybe). Still, I feel like there are a lot of much bigger moving pieces in the overall calculus of costs of college that 529 plan tax advantages aren’t really the primary driver moving the needle.

So, for example, the total budgetary impact from 529 plans & prepaid plans is scored at around $1bn/year (page 39 here). If you’ve never worked with OMB numbers that sounds like a lot, but there’s a special phrase for a number like $1bn/year in the beltway: it’s called “a rounding error”. This is less than peanuts in the overall scope of the budget.

Which leads me full circle to an interesting question: what’s really going on here? I mean, the Obama administration is, depending upon the color of your pin, either Reed Richards or Lex Luthor—you may hear that he’s evil or a Marxist, but not usually that he’s a moron. Yet, this was an unbelievably dumb thing to propose, and honestly, it was entirely predictable that it would be not only a hideous failure, but a very public hideous failure. Again, any on-the-ground CPA could have told anyone in the administration willing to listen that these plans are one of the only reeds the government gives to parents grasping at straws to find the money to cover college and pulling it away would be…well, like stealing porridge from an orphan.

Unless there really is a brilliant “I’m thinking 3 moves ahead of you” long-game/long-con (again, depending on the color of your pin) strategy. If so, could it be this:

The left wants to win the next election. Statisticians working hard have studied the impact of the Tea Party on electoral results for the right and have determined that the optimal game-theory path is to alienate and marginalize the Elizabeth Warren/Bernie Sanders progressive wing. To do so, Obama created a straw man (the proposal to cut back 529 Plans) that pretty much most of America would hate but die-hard progressives would love. This lays the foundation for important discussions of party planks between centrists and progressives, for the centrists to say “look at what your wingnut policies cost us on that 529 debacle”, thus isolating progressives from the central discussion in formulating policy and, you know, trying to make radical change or something crazy like that…

Paranoid? Or not paranoid enough….


Cathy’s short response: nobody except the affluent middle class (and the rich) has $100 extra to begin with.

Categories: Uncategorized
  1. Concerned Uncle
    February 5, 2015 at 7:53 am

    A great read, thank you. Though this analysis doesn’t factor in financial aid. For example, if grandma wants to contribute to a 529 plan, is she helping anyone but the eventual college? Shouldn’t she hang back and help fix the mess after middle class couple goes it alone?


    • FogOfWar
      February 5, 2015 at 2:07 pm

      Yes–big, big practical point: if you are NOT the parent, you should think hard (and talk to the parents) before you contribute to a 529 plan: you may be ‘killing with kindness’ by knocking your grandkid/niece out of eligibility for financial aid.

      Really important practical point; glad it’s first on the comments!



  2. JSE
    February 5, 2015 at 8:46 am

    “You’re free to say “cry me a river”, but these are people, and all they want is the best for their children and to villainise them for such doesn’t sit well with me.”

    The idea that suggesting elimination of a tax break is “villainizing” the tax break’s recipients is part of the problem.


    • P
      February 5, 2015 at 5:04 pm

      +1, particularly when these plans are a good source of ways for financial services companies to manage more money along with creation of a more complicated tax system with all the lovely side effects this has.


  3. Christina
    February 5, 2015 at 11:24 am

    The 529 encourages people to save for their kids to go to college who may be middle class but have no college themselves (they have the disappearing jobs their kids won’t have). So the question becomes: are parents more likely to save for their kids to go to college and aim for their kids to go to college if 529 plans exist?


  4. kcm
    February 5, 2015 at 11:45 am

    529 plans are counted as parent assets for the purposes of FAFSA and, I think, CSS Profile. That’s one of the advantages.

    I think the point that income is not necessarily a constant, or monotonically increasing, value from year to year is important and not stressed enough. There are lots of situations that could result in a substantial temporary bump to income – small inheritance, large bonus, taking a high-paying but unsustainably stressful job for instance.

    And the families making 75K-200K are legion and all very stressed out about how to pay for college, if they have kids and if they value education. I have a child who is a senior, and multiple nieces and nephews in high school – the discussion in favor of removing 529 plan benefits seems incredibly tone deaf. Everyone who has contributed to one of these plans has done so because they 1) value education and 2) were trying to be proactive and responsible.


  5. dotkaye
    February 5, 2015 at 11:48 am

    a minor technical point – note the 529 state tax advantage applies only to the 529 plan for that state, so the state tax advantage has to be compared with the costs of the 529 plan. The 529 plan for CO was run by Wall Street weasels with high costs. Instead I chose a low-cost Vanguard plan through Iowa, which did not offer any state tax benefit. Total ROI was higher that way in my calculations, though it is true I have not done retrospective analysis to confirm.

    I really don’t understand the goal of removing the tax advantages of 529 plans. Surely the student loan industry is a far more powerful driver of increasing tuition, in terms of subsidies ?
    It does seem 529 plans, like the mortgage tax benefit, are mostly doing upward redistribution.

    Agree with Cathy, fully-funding state schools seems to me the best way to start driving costs down.


    • FogOfWar
      February 5, 2015 at 1:57 pm

      That’s more than a technical point & didn’t have time to get that granular. We’re fortunate here in NY to have a decent direct 529 plan without onerous fees, other states are not so fortunate!


  6. February 5, 2015 at 12:12 pm

    Wait, sorry for being dumb here, but why does a 529 have no federal tax advantage for a couple making $250k, as compared to investing in stocks on the side?


    • FogOfWar
      February 5, 2015 at 2:01 pm

      I was a little tricky: there still is an advantage over buy-and-hold outside stocks (b/c the ultimate CG is taxed upon cash out), but no advantage over paying down student debt (b/c the “return” is tax free given that the interest no longer paid carried no tax advantage).

      I’m guilty of a little hyperbole to make a point there, b/c paying off student debt is often a limited investment option (esp. at that cohort), but the core point that the % attributable to state advantage vs. federal advantage at higher income levels is radically tilted to state benefits.



  7. Ursula
    February 5, 2015 at 12:14 pm

    Even in New York State, the median household income is well below $75,000. Describing that figure as “true working class” seems a bit odd.


    • FogOfWar
      February 5, 2015 at 2:02 pm

      You think living in NYC (not NY State) on $75,000/year makes you “upper middle class”? I’m calling a reality check.



      • P
        February 5, 2015 at 5:12 pm

        Even in Queens, the median is below $60k/y

        $75k/y seems upper middle to me.


        • FogOfWar
          February 6, 2015 at 8:16 am

          You’re welcome to your views on where ‘middle class’ starts and ends, and I’m free to disagree.

          The numerical analysis above holds pretty constant from $75 to $60k–not much change in the rate brackets and actually less chance they’ll Sch A, so an even stronger case for 529 plans at $60k.



        • February 6, 2015 at 8:20 am

          Guys, let’s all try to get along. A NYT piece about being middle class in Manhattan includes the line, “My niece just bought a home in Atlanta for $85,000,” she said. “I almost spend that on rent and utilities in a year. To them, making $250,000 a year is wealthy. To us, it’s maybe the upper edge of middle class.”


  8. Daniel O'Neil
    February 5, 2015 at 1:56 pm

    Ursula: I think that’s the real core of the problem here. Those defending the 529s tax shelter is really thinking about the middle class. The examples and anecdotes are ultimately made by people in the 85th percentile or above, almost without exception.

    Which is fine, but the point is that the benefit is not serving those it was designed to serve.


  9. February 5, 2015 at 7:24 pm

    Agree with Cathy’s one-line response, and also Ursula, Daniel, etc.

    I’d also emphasize that the 529 change was paired with an expansion of the “American Opportunity Tax Credit”. A real evaluation of the progressive/regressive tendencies of the change should be comparing how these various groups fair under 529s vs. the AOTC (something I know very little about).


  10. Auros
    February 6, 2015 at 12:35 am

    This is a brilliantly written apologia, showing that 529s are generally good at helping with education. But that’s not what you need to argue, to show that Cathy was wrong, or that Obama’s suggested policy was wrong.

    The problem is that while the 529 is pretty good, it is clearly not as good as a policy whose benefits do not depend on your ability to invest, or the way your tax bracket interacts with your investment income. 529s are, and always will be, more beneficial for the upper middle class than the working class. Replace it with a refundable tax credit (either expand an existing one, or roll several credits into a simplified one that’s expanded using the savings), or just spend the money you save from it on bringing down the tuition of state universities.

    Similarly, in your “thought experiment” about 401(k)s, I would quite cheerfully wipe out the Rube Goldberg machine of 401(k)s, IRAs, and so on, and replace them with a sovereign wealth fund that augments Social Security.

    Unrelatedly, I think defining “middle class” as $75k is a smidge high — I’d go with $65k, closer to the actual median — and defining $250k as “mass affluent” is just silly. If your family earns $250k in a year, you are rich.


    • Auros
      February 6, 2015 at 12:39 am

      Oh, also, re: “why didn’t they talk to the AICPA (the national organization of CPAs)? These are the people who are most commonly on the ground talking to clients (rich and poor alike) about whether a 529 plan makes sense for them.” You’re joking, right? You think the poor, or even the real middle class (not upper-middle, 85th to 95th percentile types) can afford a consultation with a CPA about what kind of savings accounts they should get?


      • FogOfWar
        February 6, 2015 at 6:11 am

        I’m not joking. Look to the H&R Block on every corner, or the thousands of small CPA shops in lower-middle and lower-class neighborhoods around the country. In fact, I think the working poor are often over-served by tax advice (in part because of the way the EITC plays out).

        If you think $75k is “upper middle class” and $250k is “rich” in New York City, I respectfully but very firmly disagree.



        • Auros
          February 6, 2015 at 1:44 pm

          Regardless of the quibbles, I still feel that this whole argument completely misses the point. 529s, 401ks, and so on, are not the kind of boondoggle that a lot of corporate tax loopholes are. But they are still obviously inferior to policies that do not deliver more benefits per person to people in the $100-200k income range, than to people in the $20-50k range.

          A benefit that was delivered equally to every student, rich or poor, would be better and fairer. A policy that delivered a greater subsidy to poor students than upper middle class and arguably-rich ones would, IMHO, be better and fairer still (both for Rawlsian reasons, and because I believe our current extremely-skewed distro is dangerous to democratic governance, and harmful to long-term growth), though I can see the logic of arguments to the contrary.


      • Guest2
        February 6, 2015 at 10:53 am

        I agree. Loads of people I know and work with don’t even make enough to have to file with Uncle Sam. And even those that should, don’t. Fog is suffering badly from availability bias.

        But he is also ignoring the edububble that all these payment schemes are inflating, making him a silent sycophant for a doomed empire.


        • FogOfWar
          February 6, 2015 at 11:50 am

          “…making him a silent sycophant for a doomed empire”. Wait, is this comedy or are you being serious? That was pretty awesome alliteration if the former…



    • DJ
      February 6, 2015 at 5:11 am

      Well, let’s be clear here: Anyone who makes an average of $250k a year is rich, but FogOfWar’s example involves a couple who makes $250k in a single year in isolation. I do not agree that a single $250k year, by itself, makes you rich. Perhaps you have a highly variable income stream, and you make $0 in nine out of ten years.

      Far from being a trivial point, this distinction is actually extremely important from a public policy perspective, because a very large fraction of high income earners hold that status only temporarily: http://www.nytimes.com/2014/04/20/opinion/sunday/from-rags-to-riches-to-rags.html


      • FogOfWar
        February 6, 2015 at 8:23 am

        Interesting article. I agree, and would go a step farther: how many of the 1% (and the “1% of the 1%”) are there because they are selling a business they spent years, decades, or even a lifetime building and are showing a huge one-time capital gain? That’s not a rhetorical question, it’s a factual question and one that has a significant impact on how one views income statistics. If someone spends 20 years building a business and cashes out for $2m, they really earned $100,000/year (‘extra’ above salary/draw) over 20 years, not $2m in that year, but if 20 people rotate that scenario every year, it creates one additional ‘million dollar per year’ statistic.

        My intuition is that this is more than a rounding error in the data, and wonder what kind of analysis is out there.



        • Auros
          February 6, 2015 at 1:38 pm

          On the small business issue, it’s worth noting that if your business was a sole proprietorship — or any of the other common small-biz forms, basically anything but a C Corp — the profits of the business, even if retained / reinvested, are recognized as personal income in the year they’re earned. So yes, you can have substantial capital gains in a year of sale (though those should be long-term capital gains, taxed at a preferential rate, no?) but it’s not like none of the money involved in building the business was taxed previously, and all of it is taxed in one lump at the end.

          Also, if you get rid of some assets at a loss, around the same time, you can offset some of the gain.


  11. FogOfWar
    February 6, 2015 at 7:42 pm

    Agree on flow-through of small business income (and LTCG on sale gives better tax rate). Common fact pattern would be something like a retail shop earning the owner $100,000 per year for 20 years, and then the shop is sold to a larger competitor for $2,000,000 at the end (sometimes as retirement planning). The spike in income reported as data from sale is dramatic. I won’t categorize the $100,000 or $2,000,000 with any class descriptions, but one number is mathematically 20 times larger than the other number, and curious how often this kind of thing happens (suspect: often enough to be significant to the statistics of income data set).

    Yes, selling assets at a loss would offset gain, but usu the capital gain is so big it dwarfs out any other economic actions that year (or even that decade). In the example above, the shop owner is unlikely to have a $1m stock investment purchased originally for $3m hanging around in her portfolio (unless she’s a trust fund kid and the retail store is just for fun).



    • Auros
      February 6, 2015 at 8:23 pm

      My impression from long-time armchair analysis of the labor stats is that the kind of thing you’re talking about is common enough to be “material”, as the accountants say — it’s enough to move the least-significant digit — but only barely so. The vast majority of people earning labor income are employees with either no, or only a de minimis ownership stake in the business that pays their wages. (ESOPs and ISOs do not a true owner make, with some rare exceptions — I know at least one highly lucrative financial management firm that is basically a co-op, with shares distributed over time to active employees through the ESOP.)

      Meanwhile, business income (schedule C, K-1, etc) and capital income (schedule D, etc) are both even more concentrated than labor income. To a first approximation, they might as well be entirely earned by the 1%.

      So I’m highly skeptical that the “typical” person pulling in millions from the sale of a business is going to be middle class. I’m with you on the idea that those people deserve some consideration, but I don’t think we should gear the whole tax system around them. They’re outliers.


      • DJ
        February 6, 2015 at 8:29 pm

        I also have no hard numbers, and I wish I did, but we must remember: The top 1% are themselves outliers. You’re comparing outliers with outliers, and it’s certainly not clear to me that the (rare) business owner with a large one-time gain is outnumbererd by the (rare) individuals who are well off every year.


        • Auros
          February 7, 2015 at 1:16 am

          I remembered that this topic came up a few years back, with some people arguing that rising inequality was OK, because it would be different people earning in the highest range, each year. There was a CBO report that found both that this is not particularly true, and that it has become less true over time. This Krugman post is a pretty good point to jump in — the Sargent piece was good, and the immediate link back to the Millionaire for a Day quotes the CBO report (and provides a link, though I think you might have to try the Internet Archive’s Wayback machine to make it work). Of course, Krugman’s been fielding this argument from conservatives since 1992 (see the segment titled “The Conservative Response 3: Income Mobility”).


  12. johnberk
    February 7, 2015 at 5:00 am

    Great read! And very simple to understand even for me. I basically agree with your propositions, although I live in a different environment (even more taxed than NYC). But I believe it still holds if my family stays in the second lowest bracket (75k). Also the life is not so simple, but I believe you because I have read a very similar report from Garth Turner, who is a sound financial expert. It is about investing in assets, not about putting your money into one or two major things – like education or real estate (despite the small possibility that it could turn out well in a longer run)


  13. Jennie
    February 11, 2015 at 11:06 pm

    A bit late to the party, but one thing I didn’t see noted anywhere else in the comments … although you assume student loan debt in your analysis which presumably implies relatively recent graduation, the reality is that the difference between your working class $75K couple and your mass affluent $250K couple could be as simple as 15 years.

    Of course, I am not saying that every couple making $75K will be making $250K in 15 years. However, the average age of the first time mother has risen over the last few decades (http://www.cdc.gov/nchs/data/databriefs/db21.pdf); at a simple 3% raise per year that $75K becomes $101K in 10 years and $117K in 15. Go back to school for an advanced degree? That’s 5-7 yrs at a lower rate, but then you could get a big boost. Transition to a related career with a higher benchmark, or get a nice promotion? That $250K is not so out of reach.

    Now, leaving the possibility of high variability over that 15 years aside, many people will argue that this older couple doesn’t have as much debt and so there is less competition for their savings dollars. That may or may not be true depending on what really happened in that 15 yrs, but one thing that they definitely have is less time to re-build any retirement investments after their children graduate from college.


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