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Some related articles : Recession Won't Impact Social Security, Trustees Report How Much Will You Need to Retire? It Helps to Plan
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The Great 401(k) Hoax By:
Cathlin Baker and Paul Chapman
Consider the contrasting stories that appear in the media: The economy is recovering; unemployment is rising. Housing starts are up; so are mortgage foreclosures. Consumer confidence is improving; credit card debt has never been higher. What are we to believe? Is the economy really recovering as the
administration would have us believe? For many workers the answer is No. In
general, economic analysis in the media favors people who are prosperous
(about 20 percent of the population) while the fate of the vast
majority—the 80 percent—is often overlooked. Now here comes a book that judges society by what is happening to working
class Americans and the news is not good. The Great 401 (k) Hoax: Why
Your Family’s Financial Security Is at Risk, and What You Can Do About It
is written by a highly respected team. —Bill Wolman, who until recently
was Chief Economist of Business Week magazine and Anne Colamosca, a
journalist who has also written for Business Week. Both are good
friends of The Employment Project. They are not Wall Street cheerleaders. As their previous book, The
Judas Economy The triumph of Capital and the Betrayal of the Work,
warns, our nation’s social and economic policies are not worker friendly.
The main focus of the book is retirement income for families. The pensions
that workers are counting on are grossly inadequate. Over half of American
families have no 401(k) plans and must depend on Social Security, which in
1999 paid an average of $804 per month. For those who do have 401(k)s the
median total value is a mere $13.500, barely enough to support a
family for a few months, let alone years or decades of retirement. (A
privileged few do have 401 (k) balances.) The growth of retirement funds
depends primarily on the volatile stock market and the market is in for
trouble. Looking at the history of market behavior, Wolman and Colamosca
point out that boom years such as we have just experienced are inevitably
followed by lean years—years in which the 401(k) are apt to lose value or
disappear altogether, à la Enron. But all is not lost, and the book
includes some advice about how to avoid total retirement disaster. Here
follows some tidbits from the first chapters: “ The financial future of the American family is precarious… The long
term economic outlook raises serious questions about the adequacy of the
401(k) as the foundation stone of the American pension system. The record of
the 401(k) shows that it left most Americans grossly unprepared for
retirement after two decades of stock market boom. Ninety percent may indeed
have a difficult time putting together enough funds to support themselves as
the years go by.” (p.5f.) “ The American public has been hoodwinked by political and corporate
forces into relying on the 401(k)… The 401(k) represents an implicit
promise to middle-class Americans that they can live off income that they
receive from stock ownership, just like the rich do. It is a promise that is
impossible to fulfill.” (p.12) “ History suggests that the rate of return to systematic stock savings
will be far lower than the inflation adjusted 7 percent figure [that Wall
Street projects] We optimistically assume that the 1.9 percent real rate of
return to stocks that prevailed after the 1966 market peak is the likely
outlook for the opening decades of the twenty-first century. Under these
conditions each $1,000 invested annually for twenty years would result in
the accumulation of a portfolio worth $24,506… No matter how this sum is
sliced or supplemented, it provides the opposite of a comfort zone for
retirement.” (p. 21f.) “ The 2000 election witnessed much talk of faith as being central to American society, but, in truth, it was not the God of our fathers, but the god of Wall Street, that had long since moved to the center of the American psyche as the fit subject for serious worship. The Stock market had been sold throughout the 1990s as the one ‘sure’ way that the American family could control its financial and ultimately its psychological future, at the same time most other things in their lives —school, corporation, job security—were reeling out of control. “ It was a triumph of marketing. Wall Street worked hard, and for a
long time successfully, to convince the American family that stock
certificates, a currency they never really saw, were the only assurance of
long-term financial and therefore family stability. It was, as we have seen,
a deeply flawed message. But for the last two decades of the twentieth
century, the entire society seemed to conspire to help Wall Street emerge as
the institution that could be trusted above all others. Millions of
Americans who had rebelled against traditional marriage, medicine, religion
and diets throughout the later part of the twentieth century rallied
together as traditional ‘ true believers’ in the stock market, even
though the salvation it was selling was as phony as that of Sinclair
Lewis’s lustful evangelist, Elmer Gantry.” (p.37f) “ The 1920s have a unique place in the American mind as the last time
that the United States took leave of its senses and centered its hope and
dreams on a grossly overvalued stock market… But the truth is that the
market mythology that created the great boom of the 1990s is still very much
alive at the time of this writing, in early January 2002. The 401(k) has
elevated the stock market to a much more important role in the American
psyche than it ever achieved during the Roaring Twenties, and the illusion
that stocks promise unimagined wealth is stronger than ever” (p.57) “ Nothing is more important to the American family than to understand the true origin of 401(k) plans. It was the slow-growth period in the American economy, the years from the beginning of the OPEC oil embargo in 1973, to the mid-1990s that undermined the old pension system. The 401(k) became the new model for pensions, not during a period when American capitalism was enjoying great economic success but rather when the great corporations were having a tough time making money. “Of the many consequences of that great slowdown, the ones most
important to the evolution of what was to become the new relationship
between the Street and the family was the burning desire of corporate
America to get out from under its long-term commitments to its employees.
And if this meant chopping away at the employees’ social safety net, so be
it. “ In the corporate gloom of those slow-growth days, companies were forced to report that they had underfunded pension liabilities on their books. Great corporations from General Motors to Caterpillar to International Paper and even IBM came under severe pressure. The stock prices of many companies fell, and their ability to raise capital on Wall Street was impaired. “ The upshot was a frantic hunt for ways in which corporations could
get out from under. And the solution that emerged was simple: Design a
pension system that depended not on defined benefits for employees but
rather on defined contributions made mainly by employees. If a corporation
could meet its pension obligations by paying workers a fixed amount of money
each year and allowing those workers to invest the pension money themselves,
the dreaded unfunded liabilities would simply go away. In effect the
corporation told its employees: Here is, say, $5.000 a year, which we will
give you to put into some funds of your own. The money will be invested. But
we are not responsible for whether it will be enough to provide a decent
pension. That depends on whether you stick to the plan and how well the
investments do. The 401(k) was, in effect, the major tool used by the Wall
Street to capture family values. Nothing worked more certainly to provide
fuel for Wall Street’s massive drive to capture the public’s
resources… “ No ‘sell’ ever began to click or take hold of the popular imagination the way Wall Street’s version did in the mid-1990’. Hands down, it was a winner. Labor halls, libraries, banks, university buildings, restaurants, and grocery stores relentlessly tuned their TV’s to financial news throughout the day for their many customers bent on keeping up with the market… “Tying the fate of the American family to level of the Dow Jones represented a radical restructuring of America’s pension system.” (p. 46-47) FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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