Political tides, like the tides in northern Maine, change fast and run hard.
Only two years ago 401(k) plans were Investment Nirvana for middle-income workers.
Today they aren’t worth shooting.
One indication is “The Great 401(k) Hoax,” by William Wolman and Anna Colamosca. Arriving on the spring tide of new books and published by Perseus Publishing ($26 in hardback, 221 pgs.), the book is sure to feed growing public frustration.
Early on, the writers declare, “It felt great while it lasted. But the 401(k) will turn out to be the greatest systemic financial hoax ever perpetrated on an unsuspecting public.”
A few pages later, they make the declaration again: “The 401(k) represents an implicit promise to middle class Americans that they can live off the income they receive from stock ownership, just like the rich do. It is a promise that is impossible to fulfill: It is the great 401(k) hoax.”
The basis for the declaration is their contention that we are heading for a long period of dismal investment returns, that history shows we have had such periods before, and that our Wall Street-created expectations are far higher than anything reality will deliver. The result will be a lot of angry people who will live out their retirement years in desolation and poverty.
Specifically, they point out that stocks rose to unsustainably high levels three times during the last century: 1901, 1929, and 1966. After each of these highs, stocks fell into a long funk. In the twenty years following 1901, for instance, the inflation adjusted annual return on common stocks wasn’t the familiar 7 percent made famous by Ibbotson Associates in Chicago. It was minus 0.2 percent. It was only 0.4 percent for the twenty years following 1929. It was only 1.9 percent for the twenty years following 1966.
While the annual investment of $1,000 would accumulate to $43,873 at a 7 percent real return, it will only accumulate to $24,506 at 1.9 percent— quite a difference.
As a consequence, Wolman and Colamosca tell us that 401(k) plans are a “hoax” on the public.
I think calling 401(k) plans a “hoax” implies that there is someone to blame for the dilemma we face. There isn’t.
Human beings, across the planet, have been struggling with the issue of retirement income ever since our life expectancy exceeded 60 years.
We haven’t found a solution yet.
We haven’t found a public sector solution. We haven’t found a private sector solution. The more successful we are in public health and medicine, the larger the financial dimension of growing life expectancies becomes. Retirement income is a “Cadillac Problem,” the kind of problem we like to have. There would be no problem if we all died young.
We have tried government income transfer programs like Social Security. They are worrisome because the ratio of workers to retirees declines as birth rates fall and life expectancies rise.
We have tried corporate defined benefit pensions. They are problematic because most people don’t have single-employer careers and pensions are determined by years of service with a particular employer. As a result, your pension check depends on the number of employers you have more than the number of years you work.
We are now trying corporate defined contribution plans. These are problematic because most people don’t save enough, don’t save early enough, and don’t get a high enough return on their investments. This is a problem even if the stock market is providing a real return of 7 percent a year, let alone going through a major slump as Wolman and Colamosca envision.
Add all three retirement tools and we’re still a long way from solving the problem.
There is a reason for this.
The most important fact in the retirement income riddle is biological, not financial. Our biological success is more powerful than any financial mechanism any government or private entity has created, anywhere in the world.
Don’t expect frank discussion of this from your handy politician, whatever her political stripe. They’re too busy creating blame. Don’t expect frank discussion from corporate leaders, either. They’re too busy taking money out of payroll costs so they can build their yachts and palaces.
The remedy is for you and me, on our own, to change how we manage our lives. The remedy is to put biology and finance in balance by saving more, working longer, and consuming less.
Then we can live long and prosper.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or en
(c) Scott Burns, 2022