Money Sage (archive)

Well folks, we confess: we are weary of reading endless, daily paeans to the glory of the 401K. Let us place our cards on the table at the outset: we regard the 401K "solution" to the retirement problem as a SHAM.

The endless genuflecting before the idol of the 401K constitutes a case of analytical deflection, motivated by a desire to draw attention away from the shift of wealth from employees to corporations, as well as the plenitude of pain for future generations of retirees the 401K "solution" portends. It would not do for corporate America to acknowledge that in placing responsibility for retirement saving and investment decision-making on the shoulders of those ill-equipped to impose stringent self-discipline and make difficult investment decisions, it has not only insured the indefinite fattening of its own bottom line at the expense of its employees, but has simultaneously consigned most of the latter to "golden years" whose hallmark will be poverty. Obviously, no one can live above the subsistence level on the pitiful payments of Social Security, even if latter are not cleverly parsed by "inflation-adjustment" measurement changes or other means.

The realities of life for working America are very clear: there is never enough money coming in. The "consumer stretch" characterizes consumer behavior. Few are putting much aside for the proverbial rainy day (or, rainy season of life, to wit, the "retirement years.") The lack of retirement saving is not primarily a function of a lack of moral fiber in the Calvinist sense. Rather, it is reflective of the reality that for most working families it is impossible to stretch means to make ends meet without recourse to ever-greater BORROWING. Borrowing, at interest rates well above the rate of inflation, constitute an endless, and compounding, source of defacto, if currently concealed, impoverishment. Consequently, the future capital base for workers is being eroded at the very time when they need to be expanding it. To say that it is unrealistic to expect workers who must borrow to remain "solvent" is to state the obvious.

Nor do we accept the contention that today's employee/consumer -- who is tomorrow's retiree -- is "responsible" for his ostensibly "irresponsible" behavior. People, after all, live in a culture which shapes their behavior. Since the economic machine requires massive -- and indeed, apparently endlessly growing -- indebtedness, employees/consumers are inculcated with the imperative of spending and acquiring all the goodies so teasingly offered up by businesses via the mass media. To demand that the beleaguered employee/consumer save 10% or 15% of his income is akin to demanding that a 6-year old child master calculus.

Those who benefit from the shift of responsibility for the retirement of working America from corporations to the individual employee find it essential to bridge the perceptual gap between the reality of the financial grind of daily life with the illusion of retirement security. In order to douse any possible eruption of anger and demand for change on the part of these folk, a skillful public relations strategy is employed. The ordinary folk are endlessly told to focus on the power of compound interest, and the amount of money they will have if their capital grows at 8% a year. The strategy of endless repetition, bolstered by sanctification by the financial and political authorities, DEFLECTS attention from the reality that achieving 8% a year is somewhat difficult when 30-year government bonds yield less than 4 1/2%. If -- and it is a VERY BIG IF -- the historical, long-term return of stocks produces the 9% AVERAGE returns generated since 1927 (the inception date for most of the "statistical" analyses of equity returns)-- the problem remains unsolved. For there remains the issue of how to persuade people, who are unable to make ends meet working full-time in dual wage-earner households, to save 10% or 15% of their income, even in times of job loss, sickness, escalation of house payments, rises in borrowing costs, special expenses in the form of junior's orthodonture and college bills, etc.

There is ALSO the crucial issue of insuring that the employee/consumer/harassed mom/dad will not waver in his stock investments in the face of BEAR MARKETS. The 2000-2002 bear market, we would remind folk, recorded a 50% loss as measured by the S&P 500, which constitutes 90% of the market capitalization. What does the employee/consumer/harassed mom/dad do as his retirement portfolio is evaporating before his very eyes? Repeated pronunciamentos from on high to stand fast, and endless advice to do this from personal finance columns are not likely to do the trick in the face of market panic, fanned ever so skilfully by the media. As one statistical study after another has demonstrated, the average investor earns only a small percentage of the equity market return OVER TIME. People, especially those with little margin for error, DO NOT HAVE NERVES OF STEEL. Surprise, surprise. Nor is it even certain that if they manage, with superhuman self-discipline to hang on, that things will come out well. Consider the experience of investors in the world's second greatest economy. In the autumn of 1989, the Nikkei Index of blue chip Japanese stocks stood at 39,000. Japanese market gurus maintained that the 15% average annual appreciation rate which had obtained for many years would continue indefinitely into the future. Looking out to 2008, this would have placed the Nikkei at 183,3000. In fact, the Nikkei currently is below 14,000. Thus the Japanese who kept the faith over the past 19 years possesses precisely 7.6% of the amount he was told to expect. In other words, he has only ONE-THIRTEENTH OF WHAT HE NEEDS. And this holding fast as directed would have entailed an amount of psychological pain and emotional stress which is truly INCALCULABLE.

No amount of verbal assuagement from on high or from your friendly neighborhood personal finance columnist can alter the reality of the 401K: it is, in large measure, a sham. The future is unpredictable. Those with the deepest pockets, the highest margin of safety, and the skill and emotional non-involvement are the only ones in a position to assure, to any reasonable degree, an adequate retirement.

Why not call a spade a spade? The 401K is the illusionary equivalent to the insistence of the consumer culture that you can live far beyond your means ad infinitum without deleterious consequences. Life is not a fairy tale. In a low interest rate environment, characterized by persistent global deflationary wage pressure, those depending on a 401K will have no retirement. They will do what folk did before Social Security existed.

You know what that means.