Sunday, April 29, 2012

"Faith based retirement," or maybe just bad choices 

Joe Nocera's Friday column on his "faith based retirement" -- his account of his 401(k) account, as it were -- is an unintentional object case in lack of accountability. Read the whole thing to get a full sense of Nocera's own transporting sense of entitlement, but consider particularly this:

The bull market ended with the bursting of that bubble in 2000. My tech-laden portfolio was cut in half. A half-dozen years later, I got divorced, cutting my 401(k) in half again. A few years after that, I bought a house that needed some costly renovations. Since my retirement account was now hopelessly inadequate for actual retirement, I reasoned that I might as well get some use out of the money while I could. So I threw another chunk of my 401(k) at the renovation. That’s where I stand today.
Nocera goes on to argue that his experiences are the most common ones, and that the 401(k) is a failure, and that therefore most Americans will not be in a position to "retire." The implication is that we are all in need of some greater government intervention to rescue us from buying "a tech-laden portfolio" at the top of a bubble, the economic inefficiency of divorce, and money-pit houses (one wonders what, exactly, the need for those "costly renovations" was -- the cynic in me supposes it was a dated kitchen and some ugly linoleum). Or, presumably, other bad choices or bad luck.

Of course, if we indemnify people against bad choices and "bad luck," we are going to get a lot more of both, as we have learned time and again.

Beyond that, the Nocera column strikes me as a powerful argument in favor of a position that I have long advocated -- that we should get out of the business of subsidizing "retirement" entirely. Retirement should be earned by hard work, thrift, and, yes, good luck.

None of this is to say that we should not continue to subsidize people who are disabled. If that disability comes from geriatrics or a crippling injury or some congenital defect, even I am socialist enough to agree that we should have a system that supports such people. The generosity of extended families and small-town duty is no longer available to a great many Americans, so the government needs to step in when people are actually not capable of productive work.

Fortunately, the physical demands of most employed work have diminished considerably, so most people can work much longer than in days past. Just as well, since work starts much later, what with all that high school and college and such. We do not work as early in life, so it is only fitting that we work later in life.

And, of course, our generation has managed to spend our children's patrimony and degrade their future standard of living, so the least we can do in return is continue to add to GDP through productive work for as long as we are able.

The left, of course, sees it quite differently.

And what it means is that we can't afford to retire. Which is bad. We will be clogging the workforce long after we want to be in it and that's not healthy.
Ah, yes, the old leftist insanity -- embodied in such brilliant policies as France's maximum workweek rule -- that there is a fixed number of jobs, and older workers need to retire to make room for the young. Quite the contrary, outside of universities and government bureaucracies and other organizations with artificially static labor structures, we need older workers to create the jobs for younger workers. Those of you who complain that today there are surplus workers, and that therefore the geezers are displacing the young, need to explain how taking older people out of the work force and subsidizing them with even more lavish transfer payments does anything other than raise taxes on either the remaining workers or our descendants.

Now, a squishy lefty -- or perhaps one who knows a smidgen of demography and math -- might say that he or she does not want to increase government transfer payments to the seniors, but that we should return to the defined benefit plans of old. Uh, friendly reminder that they failed or are failing too, not only for the reasons at the link but because defined benefit plans are subject to political fashion. People fuss with the discount rates and other assumptions to achieve some short-term objective like nominally balancing a budget or making a quarter, and big pension funds come under pressure -- not surprisingly, also from the left -- to make investments to achieve "social change" rather than high rates of return.

No, in the absence of a massive surge in birth rates and a huge influx of immigrants who are delighted to transfer wealth to older Americans, there are only two ways to pay for an able-bodied golden age "retirement" -- by dint of one's own savings, or by damaging the standard of living of our posterity. There is no third choice, Mr. Nocera, so stop the whining and wishing for magical salvation.


By Blogger MTF, at Sun Apr 29, 10:56:00 AM:

What's your point? Are you arguing for an end to the Social Security program? If so, good luck with that. Are you suggesting that the tax shelter associated with 401-K's is somehow a "subsidy"?

Aside from the curious word choice of "subsidy", your larger point is probably that Americans need to learn to save earlier, invest more wisely and spend less money. Good advice.

Oh, and I couldn't agree more with your advice to the Joe Nocera's of this world: shut up, and find productive work. Your whining is annoying. If you aren't making enough as a journalist, get a second job, or a better job. Maybe as a flack for the evil corporation....  

By Blogger PD Quig, at Sun Apr 29, 11:31:00 AM:

Yeah, Joe's problem is that his 401k failed him. It invested in the tech bubble, it invested in granite counter tops, it divorced his old lady. Joe obviously has never learned that, for the most part, you make your own luck in this life.

Stop doing dumb-assed things, Joe, and your 401k will stop doing dumb-assed things.  

By Anonymous tyree, at Sun Apr 29, 03:25:00 PM:

"The harder I work, the luckier I get"

Joe may have been working hard at something, but most of us saw the tech bubble for what it was, a bubble. He wasn't working real hard on that part of his retirement.

Social security needs to be reformed and benefits need to be scaled back to equal income. That is the math part that our President keeps harping on. We can't force the grandkids to pay for our benefits. The mismanagement of the Social Security system is not bad luck, it was incompetence and/or corruption.  

By Blogger Georg Felis, at Sun Apr 29, 03:40:00 PM:

Poor Joe. Smacked vigorously with the Reality Cluebat, and none of it seems to have soaked in.

1) That 401K? it's not just yours, half of it is for the Spouse too, unless she has one the same size already.
2) Anybody investing who does not diversify, will eventually get gobsmacked.
3) Breaking into the piggy bank and then whining about it being empty is something a child does. Or a Liberal who wants everybody else to pay for his retirement.

I'll give you some free advice Joe. Buy a copy of Dave Ramsey's book, or borrow it from the library. Follow it. Attend a set of Financial Peace University classes in your neighborhood. They're cheap. They pay back a hundred fold, easy. Reduce your standard of living NOW, used cars, local vacations, get on a freaking BUDGET, sock away money like a rabid squirrel hording nuts. Listen to what your liberal buddies want you do do with your money and do the exact opposite.

And use this phrase a LOT. "I can't afford it." The more you use it, the less applicable it becomes.  

By Anonymous Ignoramus, at Sun Apr 29, 05:41:00 PM:

There are things relevant to retirement savings bigger than Nocera’s personal whining.

Telling the Pawns in Game of Life to save more and hopefully be lucky is very Thurston Howell III.

Demographics is a big driver of many of the big issues in the World right now. In many places, people are living longer but there’s a falling birthrate. Japan and much of Western Europe saw this first, but the USA will see it too. China will have its own demographic bust in a decade or two. For most of us, these big macro forces – and the political responses – will likely be more significant than what we do personally as to whether or not we’re surviving on cat food at 70.

Echoing MTF, are you saying we should just end Social Security now? Many people have paid in for a very long time. That money got spent – there is no lockbox – but a promise was made, no? We’ve already started to gut Social Security by making temporary payroll taxes permanent, and by not properly indexing for inflation. A few years of high inflation will finish the job.

We may see a long period of low or even no real US GDP growth. This presents a hard environment to generate decent returns, if you’re not a Playa. There is no Beta, there is no Alpha – just crony capitalist Gamma.

Saving will be hard, if basics get even more expensive, and Government threatens to tax what will be an ever-decreasing threshold of what our New Mandarins consider an unjust income.

Some folks who are part of the Borg see themselves as immune to this. But we’ll have an ever-growing number of Pissed-Off People with Pitchforks. In coming years, will they vote Left or Right?

Speaking of 401Ks – there’s suspicion that new taxes may be imposed on them. Obama would love to do this, if given the chance. Very peronismo.

If you’re not already rich, the only way out is to transmute ordinary income into capital gains – or play shortstop for the Yankees. But getting capital gains for your day job is hard to do, if you’re not the right kind of corporate executive or one of Mitt Romney’s kids (who were gifted Dad’s carried interest at once-only capital gains rates – nice work if you can get it).

How many posters here get a significant part of their day job earnings taxed at capital gains rates? Care to justify it? Just asking. Personally I tried once and failed, but I’m coming back.  

By Anonymous AmyP, at Sun Apr 29, 06:15:00 PM:

"Yeah, Joe's problem is that his 401k failed him. It invested in the tech bubble, it invested in granite counter tops, it divorced his old lady."

True, and very funny.

And by the way, aren't pensions just as subject to divorce settlements?  

By Anonymous John, at Sun Apr 29, 06:48:00 PM:

Seems like the writer's issues are shared by many. Of the many lessons of the various bubbles we've enjoyed, and suffered under, hopefully one is that you have to save. There are things that peopled pined for and bought that they didn't need, some with home equity that they haven't had to pay back. I suspect the standard many expected in retirement is a distant memory. Now, I paid in, and expect my social security. We're all someone's grandchild that paid in. We can start to fix our governmental spending problem by doing things that encourage the old fashioned way we call 'work' by ending the 1/2 trillion we're paying for 2 years of unemployment benefits, and cutting out payments to those who haven't paid in (and I mean, illegals who might pay in some nominal amount if they pay taxes, but take out a boat load in food/clothing/shelter/healthcare and education). For every trustfunder or corporate executive there are many who have worked their asses off and have little to show for it. And to whoever said learning "I can't afford it", amen. It'd be nice for all levels of government to learn that same phrase, and live it. Obama's administration is to blame as well for this protracted pain, adding 6T to the debt, and pumping 1T+ into the banks, who paid out 50B in bonuses in the last few years. Rounding error in comparison, but investing the peoples money to buy 55% of GM and all the other failed efforts to promote his agenda (and buy votes) hasn't helped either. As for houses and granite and bling ... sheesh ...  

By Anonymous Anonymous, at Mon Apr 30, 12:35:00 AM:

Echoing Ignoramus, the 401k movement will come to a crashing halt in the coming years for one simple reason: the inflation adjusted return of the S&P 500 over the past 15 years is essentially zero. Every indication is that the next ten years will likely produce zero gains, if not losses for 401k equity market investors.

A rate of return of zero to investors over 25 years is an epic fail--an entire generation of investors robbed of their savings. Further, in a time period in which corporate profits have been at an all time high it is an outright scam.

Where did the money go?

To corporate insiders and Wall Street traders.

An epic failure of corporate governance and of market regulation. God knows porn is more interesting to SEC regulators than their jobs.

The electoral pitchforks come out when Joe Sixpack figures out that his 401k has essentially been stolen by corporate insiders and Wall Street traders. Much like their Communist brothers in arms, Democrats are smart and will seize this opportunity. Under the guise of "retirement security" 401k accounts will be seized, either de facto or de jure, and redistributed to the masses.  

By Blogger Andrew Hofer, at Mon Apr 30, 06:10:00 AM:

I've been working for 24 years. The last twelve haven't been amazing for market returns, but the annual contributions have still stacked up. I use a mundane, 'conventional wisdom' assortment of mutual funds - the sort of portfolio the NYT financial folks would advise. 24 years at the max contribution and I have about $1 million in there. Nocera spent more of his working life in the amazing post 1980 bull market, so it's kind of incredible he blew it like this.  

By Blogger John Farrier, at Mon Apr 30, 05:58:00 PM:

Well, I'd like to get rid of the Social Security program completely.

What do we do for current retirees? The old Libertarian Presidential candidate Harry Browne suggested liquidating federal land holdings (national parks, grasslands, forests, etc.) and giving lump sum payments to current and nearing retirees.

It's a political impossible measure, of course. But fiscal solvency as a whole is politically impossible.  

By Blogger Andrew Hofer, at Mon Apr 30, 08:19:00 PM:

Incidentally, the return over 25 years through last month of the S&P is 8.99% per annum (dividends reinvested). So whatever you had in 1987 would have doubled more than twice. More than 5% after inflation, so your purchasing power has almost doubled. Nocera's generation was not robbed of their savings by the stock market.  

By Anonymous Anonymous, at Tue May 01, 10:22:00 AM:

@ Andrew,

Here is a link to a good chart of inflation-adjusted returns for the S&P 500 from 1960-2010:


The truth is that long-term stock market investing has been a bit of a demographic lottery. Americans in the demographic which started their 401ks in the late 1970s or 1980s hit the jackpot. In that respect Nocera has no excuse for his predicament.

I am not sure why you picked 1987 as a starting point, but it biases your results--the gains from '87 to '97 mask the losses from '97 to 2012. Returns for almost all investors who started their accounts in 1997 are zero or negative.

The fact that Nocera made some dumb mistakes does not invalidate Ghilarducci's contention that 401k accounts are a failed experiment. Support for 401k accounts has been strong because the stock market generated outstanding returns from 1980-1997, a period of 17 years. We are now 15 years into a period of zero or negative returns.

Support for 401k programs will diminish as the reality of zero returns sets in with investors. Voters in the 25-45 demographic have a very different view of the stock market as a wealth building vehicle than voters in the 45-70 demographic. Without a significant run-up in inflation-adjusted returns soon the 401k program is doomed.

The interesting piece of this puzzle is that corporate America has had strong earnings growth in the time period from 1997-2010, yet it has not translated into valuations. Where did the money go? Ignoramus nailed it: no Beta, no Alpha, just crony capitalist Gamma. The electoral pitchforks come out when Joe Sixpack realizes that his 401k has essentially been robbed by corporate insiders and Wall Street traders.

-Anon Attorney (who started his 401k in 1995).  

By Blogger Andrew Hofer, at Tue May 01, 08:30:00 PM:

Well, I'm not happy with the market in recent years, but there's a lot wrong in your assertions. I chose 25 years because that's what I was talking about in the previous comment. However, using Bloomberg, here are annualized returns:

5 years - 2.007
10 years - 4.108
15 years - 6.087
20 years - 8.57
30 years - 11.657 (Nocera's career?)

Apart from 5 years, these are all inflation-beating numbers. They are index returns, so by definition no alpha, only beta. "Valuations" have changed since 1997. Most importantly, multiples of earnings have decreased from the lofty pre-2000 era, when they were at all time highs, which accounts for the poorer returns since then. Overall, these returns are *higher* than the growth in the economy, so by your definition of participating, the stock market did.

My point is that a) this is sufficient to compound savings with a mundane investment, b) no money was "stolen" and c) investors participated in the growth of the economy, but the valuation bubble of 1998-2000 segmented the returns significantly, returning them to levels consistent with the economy. There's a lot wrong with the financial and political system, but the idea that your money was stolen through broad stock market performance isn't empirically supported. More importantly, Nocera built his savings during a GREAT time to build savings, with the majority of his career pre-2000 and he really needs to look inwards as to why he doesn't have it now.  

By Blogger Andrew Hofer, at Tue May 01, 08:37:00 PM:

PS, the market return from 1960-1980 was 6.975 annualized. And that twenty years is regarded as crap by most. Inflation took a whack out of the last two years of that period.

And, for reference on the earnings multiple, try Schiller's long term data. (http://www.econ.yale.edu/~shiller/data.htm)

A dollar of earnings in 2000 produced a little more than twice as much company value (stock price) as it does today. If multiples had stayed the same, we would collectively have twice as much in stocks.  

By Blogger Gary Rosen, at Wed May 02, 01:30:00 AM:

Long-term flat markets are nothing new. The DJI went exactly nowhere from July 1965 to July 1982 - seventeen years, it still hasn't been that long since the plateau reached in April 1999. And the Dow did not return to its pre-crash peak in 1929 until 1954 - 25 years.  

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