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June 14, 2004

Fraud of 401(k)s

Speaking of social security "reform" and personal accounts, this article in the New York Times highlights why 401(k)s, the model for personal accounts, are such a crock in promising a decent retirement future for most retirees.

It's also a nice analysis of how most folks who talk about retirement can lie with statistics.

Here's the bottom line. As defined benefit pensions have been replaced with 401(k)s, retirees today are poorer than they were a generation ago. This fact has been disguised in a number of ways by the business press.

First, it's often claimed, citing to Federal Reserve asset studies, that retirees are richer today than retirees were a generation ago. But these studies have a big problem:

study after study suggests that typical late-middle-age employees have accumulated more wealth than their counterparts did a quarter-century ago.

But virtually all of these studies have a flaw, a crucial asset that is left out of the equation...That asset is the traditional pension, an employee benefit that was widely available until the early 1980's but has been vanishing from the American workplace ever since.

Woops. Yep, all those old folks have more money in the bank than a generation ago, except they don't get that guaranteed additional $2000 per month from the company pension.

Even when pensions are included in asset and calculations for retirees, growing inequality in society allows an additional statistical game to be played. As one study shows, if you look at the AVERAGE assets of retired folks:

the average net worth of an older household grew 44 percent, adjusted for inflation, from 1983 to 2001, to $673,000.
Looks good, except a small class of superrich retirees are skewing the numbers. If instead you ask what assets the MEDIAN older family have -- what the family where half of families have more assets and half have less-- the numbers are bad:
When Mr. Wolff looked at the net worth of the median older household - the one at the midpoint of the economic ladder, a better indicator of what is typical - the picture changed. That figure declined by 2.2 percent, or $4,000, during the period, to $199,900.

For a generation to emerge from two bullish decades with less wealth than its parents had "is remarkable," Mr. Wolff said. Based on economic growth and market returns over those 18 years, he said, their wealth "should be up around 30 or 40 percent."

Yep, because of the decline in the regular pension, and its replacement by hype around the 401(k), the net result of the largest bull market in American history is that today's retirees are worse off than those in the period before Reagan unleashed the 401(k) on the world.

Read the rest of the article. What it makes clear is that not only did the 401(k) leave many retirees in the dust, it was a serious factor in increasing overall inequality in our society.

The discusson on 401(k)s versus regular pensions is often relegated to policy wonk seminars, but this is the substance of most peoples' retirements, and is a key factor in whether we will continue to be a society of increasing economic inequality or not.

It's a basic issue-- if we invest collectively for our retirement, we will generally create simple rules for payouts that encourage greater equality. If we create a system of individual accounts, with complex rules written by rich people, the end result will be greater inequality, since that's how the rules will end up being designed.

Posted by Nathan at June 14, 2004 07:27 AM