Where Typical Americans Have Their Wealth
UNITED STATES SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
Hearing title: “Does Wall Street Always Win? GameStop, Robinhood, and Retail Investors”
March 9, 2021
Thank you for inviting me, Chairman Brown and Ranking Member Toomey and members of the Committee. I am the Bernard Schwartz Chair of Economics at The New School in New York City, coming to that faculty in 2007 after teaching at the University of Notre Dame for 25 years. I received my PhD from UC Berkeley and serve as a court-appointed independent trustee of the Goodyear tire retirees’ $900 million health care trust fund and the autoworkers $60 Billion retiree health fund.
My office hours are typically quiet moments huddling over equations. But over the past few years, students have been bubbly, asking about their trades on the phone-friendly trading platform, Robinhood. The young are told to buy stocks and hold them – but they absorbed the first point and missed the second.
Trading on Robinhood is a game with psychologically powerful intermittent rewards and is disconnected to long term wealth accumulation. Phone Apps makes trading easy and cheaper and superficially seems to open securities markets to many more people but they do not produce wealth. Researchers at The New School, Michael Papadopoulos and Siavash Radpour, constructed the wealth data and Owen Davis helped with the Robinhood discussion. I welcome today’s hearing seeking to protect retail stock buyers from casino-type trades. And I want to emphasize that Americans’ wealth does not come from retail stock trading. I am here to testify where Americans really get their wealth.
As you might guess, home equity and retirement wealth including Social Security are the largest components of wealth -- they make up 88% of the wealth held by near retiree households in the lower half of the wealth distribution; 78% for the middle class, and 43% for those in the top 10% (Table 2).
You might be surprised that Social Security is the most important source of household wealth for half of all households with workers nearing retirement. Social Security represents 58% of net wealth for near retirees in the bottom half of the wealth distribution; 27% for the middle class; and 7% for the top 10%.
In contrast, directly-owned stocks (and bonds) make up a relatively small share of near retirees’ wealth at 8%. Only 24% of older households own stocks directly, outside of their retirement account and that ownership is concentrated at the top. Only 10% of those in the bottom half of the wealth distribution own stocks, less than a third of the middle class.
And the wealthy are not rich because they directly own stocks. Though 70% of the top 10% directly own stocks, it is only 13% of their wealth. (They own businesses (15% of their wealth), other real estate (15% of their wealth), and have 25% of their wealth in retirement accounts and pension plans.)
As Nobelist Robert Shiller recent book points out stock trading feeds a narrative, a story about wealth, trading is exciting because stocks fluctuate. Stories about getting rich on stocks produce a fiction that stock trading creates wealth, when, in fact, retail investors fuel bubbles.
Defenders of Robinhood and widespread trading have purchase because in the COVID recession people who own stocks have done well, which heightens the fear of missing out for those not buying stocks. The reality is they are being left out because they don’t have access to retirement accounts, which is where most of us who own stocks hold them. Retirement accounts are invested in diversified portfolios managed by institutional investors and professionals who can manage the risks that come with investments in private equity, etc.. and other complex instruments.
But more than half of workers do not have a retirement plan at work, which means many households do not have any investment in stocks or are accumulate private wealth for their retirement. (Radpour, Papadapoulos, and Ghilarducci 2021).
Any retail brokers’ claims that trading democratizes access to wealth only takes advantage of people's fears. I do not recommend opening up high-risk and expensive alternative investments to the retail investor it can make risk and inequality worse.
Robinhood founders frequently invoke their experience as part of the Occupy movement to explain why they want to democratize finance. But safe and professionally managed diversified investments, not trading apps, are the path to economic security. Successful investors know that “time in the market” and diversification, which are among the many benefits of professionally-managed retirement plans, are what works. Unlike “timing the markets,” which does not work, yet is that is what trading apps encourage. We need innovations in public policy to give more Americans access to what we know works - professionally-managed retirement coverage that allows everyone to benefit from the stock markets the same way you and I do in Thrift Savings Plan, in a private or public defined benefit plan, or in my pension plan Teachers Insurance Annuity Association.
Download the written testimony here.