The Magic of Your 401(k)
Just a few years ago, it was a popular idea to make 401(k)s an opt-out proposition, where you would be signed up for 401(k)s rather than having to opt in. Now, the talk is of eliminating 401(k)s, because they are thought to be too volatile a vehicle for retirement. One proposal would require everyone to invest 5% of their income in government bonds with a guaranteed 3% rate of return adjusted for inflation. But is this truly what's best for workers? Would we really be better off digging a hole and sticking our money in the ground or letting the government manage it?
Let's take the case of one worker: me. I began putting money into my 401(k) in 2005. The market decline has seen my 401(k) take a beating. It lost nearly half its value between November 2007 and the end of business on March 31, 2009. Would I have been better putting my money under a mattress? Not at all. Even with steep losses over the past 17 months, I have 35% more in my 401(k) than I've put into it over the past four years.
I wish I could say this was because I am brilliant investor, but the secret of my gain is far simpler. First, the funds and stocks I invested in went up and they paid dividends. Also, I received an employer match. On top of the gain within the 401(k), I've received tax deductions for my 401(k) contributions, as well as the saver's tax credit instituted by President George W. Bush to help middle and lower-middle class folks save for retirement. And while there have been significant losses in retirement accounts over the last year and a half, the media's focus on this has left out several key facts.
The first question is whether people would have been worse off had they not invested in retirement savings. Secondly, will most people be better off if they don't invest? In most cases, the answer to both questions is no. In general, those who have lost money wouldn't be in nearly as good shape if they hadn't invested in the first place. And if workers in their 30s and 40s panic and pull everything out of the market, they'll miss the next big increase.
Most importantly, these losses have not been realized. The value of the stock or mutual fund may have plummeted, but until you actually sell what you have, nothing is permanent. If the stock or fund goes back up before being sold, the loss may be reduced or even turned into a gain. Or if consumers transfer money from a security that's not going to make money to one that will, they could make their losses back.
Yet, as usual, media reporting and politicians make matters worse by not putting what's happened into proper perspective. There's the hyper-panic attitude when it comes to the billions lost in 401(k)s that assumes declines in stocks have never happened without wiping out everybody invested in them. Also, the coverage is one-sided. How many stories did you see between 2002 and 2008 about the hundreds of billions people made in their 401(k)s and IRAs?
Media coverage may have let you know the Dow hit 13,000, but it didn't tell you that meant people all across the country with retirement accounts were earning huge gains. Even your Pizza Hut delivery driver could be raking in some serious percentage gains. The media will tell you the story of the lady who is forced back to work because her stocks lost money. Yet the media won't highlight the successes of the guy who -- thanks to smart financial decisions -- retired as a millionaire at 52 despite never earning more than $60,000 a year. The media would only report this story if the guy made a poor move, put all his money in AIG stock, and lost it. The media doesn't want to show a positive focus on investing; it would rather focus on economic behaviors it finds worth encouraging -- like buying lottery tickets.
What drives the attitude towards investing on the left? First of all, in a paternalistic way, the left thinks it's trying to do what's best for Americans. We need to be encouraged from playing with these dangerous stocks. "No, baby, dangerous."
However, like the overbearing parents whose efforts to keep you super-safe make you super-miserable, the anti-risk crowd keeps your money safe, but there's far less of it when you're done than if you'd been able to invest it as you see fit. For example, proponents of the plan cited earlier say that you can have a 401(k) (minus any tax incentives). However, the idea of investing more is impractical for most workers. As it is, 7.65% of a worker's income is eaten by Social Security and Medicare payroll taxes. If we add 5% more for government-funded "safety funds," the federal government will have consumed more than an eighth of a worker's pay before they've even paid normal taxes. This makes investing hard (if not impossible) for your average worker, which means that when stock markets come back and boom, Joe Average will be left with nothing more than a measly 3% return, as he has no extra money to be able to invest more in the stock market.
The second thing that must be understood is that the concept of the investor class represents a threat to liberals. Labor unions have shrunk and most Americans wouldn't want to be part of one. Unions partially brought their fate on themselves by negotiating impossible to sustain long-term retirement and health benefits. This stands in contrast to the concept of the 401(k) and IRA. Unions made short-sighted deals with management that hurt the overall company and its future, because shareholder value wasn't their concern. What's happening with 401(k)s is that the future retirement of America's middle class and the future of America's businesses are becoming interlocked. When it comes to self-interest, it make sense for those with retirement accounts to consider themselves investors rather than just consumers who buy products or laborers who will spend retirement sucking corporations dry through unsustainable benefits packages.
It's this type of thinking that can turn political paradigms on their head, and the left is trying to stop it through legislative and cultural means at its disposal. The greater the populace's dependence is on government, the greater the power of liberals.
The bad news for the left is that even in the midst of the economic downturn, their mass cultural efforts to stigmatize investing aren't working. A survey conducted by Deloit Consulting showed that even with the recent declines, the percentage of people planning to increase retirement savings outnumbered those cutting back by a 33-4% margin. Hardship withdrawals are not increasing significantly. Yes, some workers are planning to work a few more years before retirement, and they're going to be smarter about asset allocation and have more balanced portfolios, but they're not getting out altogether. While some people are pulling money out, there's no run on the 401(k)s; there's not even noticeable reductions in contributions. The investor class is voting with its wallet and is here to stay.
The left's only hope to stop this historic shift is through legislation that illustrates the legal axiom, "Hard cases make bad law." As someone who is investing for my retirement, I accept the risks. I read the legal disclaimers that tell me my assets aren't FDIC insured and may lose value. All I and tens of millions of small investors across this country ask is to be allowed to make this decision for ourselves -- and that this not be sacrificed for fear-mongering paternalism.