Hmmm...so the new social contract is no job security, no health security, and no retirement security. That strikes me as a bit unfair.
I have been studying the issue of paying for the legacy costs from a past economic time, and this seems to me to be a good time for us all to rally and realize we have a moral obligation to honor what companies now cannot.
If a privatized safety net cannot do it and the system for employer based health and retirement insurance has failed, then a system where ALL social and economic risks are born by the citizen can surely not.
I have to say though that perhaps to get single payer govt insurance and a comprehensive pension system that is portable and people can understand, we might have to endure a period of this "you are on your-own--ership society"...that seems to be the only way to create a natural base of support for it...once people see that there are no real economic benefits of managing their own health and retirement lives...ie big companies will still stick it to them and the tasks are time consuming and difficult---then they will see that we need to all get together on this and design a smart effective health and retirement system/insurance that matches the underlying structural realities of our economy.
I agree with Hit The Bid's comments about the on-your-own society ... and have to wonder a bit whether the average 'conservative' voter really understands what they've signed up for. I don't believe Americans are really in favor of no safety net at all.
OTOH: A defined benefit plan is a disaster from an Employer's viewpoint: It puts one on the hook for huge future obligations, and it is far too easy to promise today-deliver-tommorw and end up with underfunded systems. As an employer, I'd never want a defined-benefit plan.
Additionally, as someone who will undoubtedly change jobs several times, the 401(k)/403(b) lack of vesting model is really benefitial to me. (But admittedly, I'm not the "naive": I've got a diversified portfolio and I'm maxing out my contributions).
It's a really tough problem, how to structure such things right. You want the employer-bottom-line costs of a 401(k), you want the no-vesting model of the 401(k), but you don't want the "naive screwing up" factor, where people do stuupid things (eg, investing in the stock of teh company working for, etc).
What do you think of automatic enrollment in 401k plans, so that workers have to opt out rather than opting in? I understand that generally people would be signed up to put about 5% of their pay into a default mutual fund, usually an S&P 500 index fund. Would this make any improvement in the poor performance you witnessed, or do you think people would move their money to the money market funds as soon as they saw a bad quarter in the stock market?
The well-documented problems with private pension plans is only a tip of the iceberg. Wait till new accounting requirements force private companies and, more importantly, state and local governments to disclose their off-balance sheet, unfunded liabilities on account of promised retiree healthcare benefits. It is likely to be especially huge for the latter group. GAO is requiring state and local governments to come up with actuarial estimates of how much these promises mean in NPV of future liabilities. This will make a molehill out of the GM and Dephi pension problems.
One reason why we came out of the stock market bust of the early '00s seemingly unscathed and defying doomsayers is not because Messrs Greenspan et al did a great job but because public and private officials with fiduciary responsibilties have cavalierly swept problems under the rug. In fact, most state and local givernments dont even make any estimates of their future retiree healthcare costs. If these problems had come to light, there would have been more pressure for belt-tightening by state and local governments, more job cuts, more benefit cuts, more tax increases, and in general greater insecurity and greater unwillingess on the part of households to borrow and spend merrily.
Holly, IBM is going to contribute a percentage of employees' salary - even if the emloyee doesn't participate. So that is even better than the Opt out plans.
From CFO: Officials also said the company will automatically open accounts for employees who do not contribute to the plan, ensuring 100 percent employee participation in the 401(k) savings plan. IBM will deposit the annual automatic contribution of 1 percent to 4 percent of an employee's salary directly into the accounts.
I'm sure IBM will see the same problems that I saw - but at least everyone will get something.
Nicholas, there is no question this is a solid move for an employer. I moved my company's plan from a terrible defined benefit plan to a defined contribution plan in '92. I actually thought the employees would do better - and the cost to the company would be about the same, but without any hidden future liability.
I was wrong. For many employees the defined contribution plan was better (we had a nice match, and employees could save their own money pre-tax). But for certain employees, it was disaster.
tea, I agree ... the pension problem for state and local governments is huge. I'm not sure when, but I expect we will see local governments moving away from defined benefit plans too.
MG, we will survive - but 2020 will be tough - the mid-age boomer will be in their mid to late 60s and many will be looking at many more years of work (or living on Social Security). I think many boomer retirees (the first with defined contribution plans) will be shocked at how little they will have.
GOOD defaults: A heavily diversified and robust default choice.
Employer contributions NOT as a match, but automatically and default enroll. EG, what IBM is doing (and what my workplace does). This means that even those who really can't justify a 10% additional 'tax' on their income into their 401(k) will still benefit.
A conversion-to-annuity mechanism on retirement. This is one of the things TIAA-CREF ends up doing, and a good thing because it keeps out the "outlive your pension" problem.
Also, some bans. NO investing in your own company. Period.
I don't believe Americans are really in favor of no safety net at all.
I don't think most middle-class Americans today have the ability to imagine that something bad could happen to them through no fault of their own. (Illness, death, job loss, etc.) It seems most Americans actually believe that it is through their own cleverness, skill and intellect that they are successful. If the other guy is having problems, well, that's due to some moral or intellectual failing on his part, isn't it?
This inability to project the idea that you might actually NEED a safety net yourself someday prevents most Americans from supporting it for other people today.
The Great Depression did wonders for enabling a whole generation of people to get over their concerns about socialism or communism or whatever the heck they were afraid of, and get on with the solution of how to keep people from starving in the streets.
In that sense, the 'Greatest Generation,' as Tom Brokaw likes to call them, got lucky -- their parents learned the hard way what happens when things go bad and there's no safety net, and the Greatest Generation reaped the benefit of it.
Too bad we're going to have to learn that lesson again all over again, the hard way.
great, just more money for the corrupt Wall Street structure. where are the tax incentives if not to give you money to them? employers control where you can put your monies via limited choices in 401k's. what's really needed is a more flexible way to invest your pre-tax dollars. the gov't should allow you to take that $14k max in pre-tax and invest it however you like. the cake is half baked otherwise.
They can even out the long periods of over average returns and under average returns. But I don't think they do this. Contributions should be consistent, periods like the nineties should not be used to cut them or promise greater benefits.
They can make retirement savings more efficient because they are based on average life expectancy rather than being required to support a maximum.
Both of these strengths depend on uncertain calculations, but reform can be made within this context. I think guaranteed payments may be difficult, but they can be made on longer term averages...
there are some accounting puzzles here, but I think it true the worker expectations of the past are no longer practical, but a system which engages in professional investment and averages risks and returns is preferable for most.
the so called 'lesson' you speak of is going to be learned again harshly by many in the near future. Only when the failings and excesses of capitalism collapse- will the needed reforms take place. The longer these excesses play out-the more harsh is the aftermath- and the 'swing to the left' will be defined.
Alan Greenspan can go back to reading Ayn Rand- that fantasy of his paranoid fear of socialism- when he has spawned the greatest fascist economic plutocracy in history-surpassing the Robber Barrons of the late 19th century and that of Calvin Coolidges roaring 20s and 'The business of America is Business'.
Frankly, I don't care if boomers retiring in 2020, who have spent their whole life living beyond their means without considering their future needs, have to live on less for their retirement. At least the 401k system and IRAs put savings and retirement accounts in an individual's own hands, and don't depend on uncertain factors like a company's future success.
I don't mean this in a personal way, but it's really foul that personal responsibility is not a factor here. People are capable of managing their own finances, and everyone can set aside 10%. Govt's proper role is to enable savings and choices and step aside, not to act as some kind of investment nanny. Making poor or risky investments, or not saving at all, are not the vagaries of life, they are concrete choices. People are adults, make adult choices and should live with adult consequences.
Even the 5 year vesting period of 401(k)s is obsolete these days. It should be made immediate.
The retirement consideration these days is not whether you will have enough for a comfortable retirement, that is already out of reach for the bulk of people, but whether you will have more than your neighbor.
I agree with FoolsMate that personal responsibility is an issue, but why should we believe that saving 10% of our income is some magical answer? History is replete with stories of those who thought they had enough (or thought they had it made) only to find out otherwise... the hard way.
The 401K process is in and of itself part of the problem. The 401K only furthers the ongoing centralization of power away from the individual and toward agencies and institutions that the public have little understanding of and thus little control over. This is ready made for the legions of lobbyists, financial gurus and Wall Street high-rollers who have made a career of gaming the system so that they always end up on top.
The 401K won't give us our financial freedom back and it won't make us more responsible.
It used to be that a man made a dollar, spent some of it at his neighbor's grocery store and saved the rest with his local banker, who then lent it out to another local business.. Both the income earner, the grocer and the banker understood their community, its needs and its shortcomings.
This doesn't happen anymore... thanks in part to the great 401K and the incessant centralization of power and influence within money markets.
Wall Street thinks they know better how to spend (invest?) our money... but all I've seen so far is a huge surge in the importation of useless trinkets coupled with a huge export of assets that once made us strong and independent. This together with the ever-expanding big-box retailers who crush every decent local business that ever tried to compete.
I remember that it wasn't long ago when we bought Manhattan for a trunk full of trinkets.
All this talk of Ayn Rand, socialism, communism and fascism is starting to scare me. You'd almost think that people were beginning to question our great American system and its never-ending appetite for centralizing, cataloging and controlling what we once thought was ours.
We'll all need a good bit of luck to survive the new ownership society.
"The 401K only furthers the ongoing centralization of power away from the individual and toward agencies and institutions that the public have little understanding of and thus little control over."
Defined benefit plans are only really useful if they:
1 - treat workers who move around fairly
2 - provide an inflation adjusted annuity at retirement
3 - are properly accounted for and contributed to.
The reality is that most defined benefit pensions provided by private industry have not complied with most of the above. At least with a 401K the worker can control the amount invested instead of relying on the good graces of their employer to contribute to a defined benefit plan. Too many employers did not manage their plans well.
401K's have their problems too but instead of crying for more statist / socialist solutions why don't we address the problems and try to fix them. Give workers appropriate default investment choices. Encourage them to invest enough.
No matter what, in the end pensions/401Ks will only be able to deliver a benefit that is determined by the underlying real return of investments and the savings rate of the participant. No amount of government magic will change this fact.
I think the bigger point here is that individuals no longer feel responsible for their own welfare, and rather, that they have been reduced to the role of some highly specialized "cog" in a larger "gear". So what we have are dis-interested citizens who feel it's "not their job", but rather the job of the govt. This is dangerous thinking.
It's what makes people sit and starve to death waiting for someone else to come and feed them.
With that said, there is no longer a sense of community either because the mentality prevails that the govt will solve all community-based and local problems...again..dangerous thinking. [Why people in New Jersey need to fund a bridge project in Ketchikan Alaska amazes me to no end.]
The solution folks, is never, ever, bigger governement.(be it healthcare, pensions, etc) How about bigger individual participation in your local community instead? If the local people want it bad enough(whatever it is) they'll work for it. You don't need to steal it from the paychecks of people who don't know you, don't live anywhere near you, and will likely never even meet you.
That quote from Job goes both ways, it benefits both the receiver of generosity as well as the giver when it is done face to face. I don't think anywhere in the Bible is compulsory taxation(redistribution of wealth) is ever recommended.
One needs a lot of capital to make a professional broker worth your while. The average worker will be investing in a company-managed 401(k) plan and/or an IRA thru ETRADE or similar discount broker.
How hard can it be to research no-load mutual funds, or the typical 10-12 fund choices in a 401(k) plan?
You are trying to make the case that a worker is an effective investor. This is simply not true.
Investing is a full time job. It is for professionals, not for typical workers. It takes research, knowledge and time. Somebody who has a full time job (or 2 of them) cannot commit the kind of resources required by this activity. To ask them to do this, is tantamount to condoning widespread exploitation.
Then again, I don't think employers should do any investing for their employees because it is best to keep the employers responsibilities as minimal as possible. (That is, provide decent wages and a safe work place. And many employers can't even handle that.)
The problem needs to be addressed by a stronger presence of the public sector in retirement funds. Perhaps a more proactive PBGC.
With a flatening world - trade barriers down and education up the only costs that will separate us are the costs of transportation, communication and local rules/laws compliance.
Unions - If they want to exist they had better unioinze the rest of the world.
Pensions - CEOs will have one. Who else in the world?
Egalitarian means equal not wealthy or even well-off.
We my be reminded that one reason for the FDR Social Security was the pry older folks out of the workforce to get more work for the younger folks raising families. Now if you have lots of debt and no pension you need a job until you drop.
My main objection to a flat world this week? Currency valuation.
The Asian countries that want their currencies weak and the dollar strong to enhance their export-driven economies are distorting the flatness of the world.
Ive got over 350 employees and the ability to take care of myself and others. But this country runs on the backs of millions of people who have no idea how to research no-load mutual funds, or the typical 10-12 fund choices in a 401(k) plan. My dad was a DuPont pipe fitter for 40 years and would have cashed out all of his mutual funds and gone to money market the day after Black Friday had I not happened to call him first.
It is naïve, if not pure arrogance, to expect the millions of worker bees who make sure the toilets flush and the lights work in this country to also become savvy investors.
I appreciate your comment about whether workers are effective investors. Actually, that was not a question I was trying to address. Regardless of to whom is delegated the responsibility of investing, I believe a defined contribution program is more financially honest and sound than defined benefits, for the reasons I mentioned above. My post was not meant to restrict or endorse public sector regulations on how those funds would be invested. However, I do believe the public sector should not have access to the funds because of what has happened to the SSI trust fund.
You're missing the point of the Book of Job, too. The moral of the story is that misfortune can happen to anyone, and even a person who has done everything right -- run his businesses well, grown prosperous crops, raised lots of children, saved his money -- can find himself bankrupt and covered in boils, through no fault of his own. His 'friends' tried to claim that he must have had hidden faults all along, but he didn't, and it's not right now, either, when we assume that people who get sick or hurt or laid off are somehow to blame for these problems.
We don't have to dismiss that people should exert some responsibility over their own lives, to the extent that they can -- but as Americans, we used to agree that there was a floor below which we would not let people sink due to misfortune. It doesn't make sense to me that as the world becomes more uncertain, we're deciding that the way to solve our problems is to remove that floor.
"Wait till new accounting requirements force private companies and, more importantly, state and local governments to disclose their off-balance sheet, unfunded liabilities on account of promised retiree healthcare benefits. It is likely to be especially huge for the latter group. GAO is requiring state and local governments to come up with actuarial estimates of how much these promises mean in NPV of future liabilities"
Exactly how governments are supposed to come up with actuarial estimates of health care costs in the future escapes me. About everything I have seen on this has assumptions built in that are more designed to move policy in desired directions than straight out analysis.
As an example the Medicare Trustees have combined an acceptance of the overly pessimistic Intermediate Cost economic projections of the Social Security Trustees (since they largely overlap this isn't a surprise) and couple that with assumptions that there are no conceivable cost-control measures. They underestimate their income going forward, then overestimate their costs and come up with "crisis".
These state and local governments are being asked to come up with health care policy on a battleground where the terms are being set by people with an ideological agenda. People are slowly waking up to the fact that the numbers underlying Social Security "crisis" are bogus. Well those same numbers are carrying through and distorting this discussion as well.
Until we have an honest discussion of productivity going forward we are not going to get anywhere. And anyone who models medical care on the basis that it will increase in cost at the same rate as it has in the past will have to explain why no one in the future will ever perform a cost-benefit analysis and say 'basta'.
There is an ideological struggle afoot. On one side are people determined to convince everyone that all collective, social solutions whether Defined Benefit corporate pension or company supplied medical coverage are by definition inferior to individual, market based plans. And are not particularly scrupulous in the numbers they use to make their cases.
I don't think people are quite so helpless about investing as one might think from looking at 401k results. It's hard for me to judge, though, because I've always found investing interesting; it might be much harder for someone who thinks it's all very dull.
However, I think that companies really need to make an effort to educate employees about different categories of investments (CDs, money market accounts, mutual funds of various objectives and make-up), and try to beat into people's heads that "average" returns have got nothing to do with any one year, and everything to do with leaving your money alone for the long term. I'm not convinced I see this effort at education, but it strikes me as necessary if you want to make people responsible for their own futures. It doesn't take alot of research or time to invest in an S&P 500 mutual fund, but it helps alot if people understand why they're doing it.
I also think that the negative side of the market gets downplayed a little when 401k plans are presented as a panacea for all of our savings problems. I have a reasonably diversified portfolio, but I still lost a huge amount of money in 2001, and even with a combination of constant additional investment and the stock market recovery, I'm only just now back to where I was before the crash. That experience has made me really appreciate the possibility of Social Security to smooth out the rough spots.
We need to remember that almost half of people cash out some money qwhen they roll over their 401ks when they change jobs...that says alot right there...
I don't really care what the savings vehicle is, when you have basically no real growth in income for 25 years, your national savings rate is going to decline if the cost of other things keeps going up relative to what you are making.
I appreciate the financially virtuous who tuck away their 10% smartly each fortnight, but realize not everyone is like you, nor will many become like you--nor should you resent people for that. American working families need to make more money. The wealth affects of the past 25 years have come from asset inflation, not due to a steady, real increase in wages (note the equity run-up in the 1990s and the housing boom of the past 5 years--taken a look at the amount of refinancing activity and HEL and HELOC equity extraction of late??? subtract that from GDP and thats where we realy are as a nation)
How do we get productivity re-linked to wages so we can get real income gains so people can take advantage of great savings options to fund a decent retirement?
I will also add that as an individual who is able to privately invest a fair amount I don't appreciate allegedly conservative plans to water down my investments for the benefit of the sell side.
Those advocating this provate investment thing are usually too feckless to invest on their own and want others to do it for them.
You've got a point, Hit the Bird. There seem to be two economies in this country, one populated by people who do get decent raises and are able to save money, and the other by people who are living on their credit cards and home equity. It's hard to have a serious discussion about savings if we don't acknowledge this.
And "How do we get productivity re-linked to wages?" When we stop believing that CEOs are the only employees who deserve credit for a company's performance, and stop letting corporations treat wage earners as nothing but "costs."
But how do we get labor's share of national income back to liveable norms in this era of globalization and wage compression pressures? I have no clue. What i FEAR is that the US standard of living must recede to a new lower equilibrium with respect to the rest of the world...that credit cards, equity market appreciateion and then house appreciation have only delayed an innevitable decline.
Please tell me I am crazy...no seriously. Let me have it.
Look, we are all going to see a return to the good old days when rich people had cheap labor, the average American was WORKED TO DEATH and died before they hit sixty.
This has always been the plan for the baby boomers who voted to have fun today and to hell with tomorrow.
The simplistic solutions to the looming problem of America ceasing to be an industrial and soon, intellectual power is all a waste when one considers that our hatred of socialism has fatally crippled our country.
Note that Japan that is very much more "socialist" than us, keeps out foreign goods and works hard to prevent any foreign entites taking jobs away, this is why they are beginning to fight China!
They aren't sitting idle and letting us take all their industry away, for example. No way.
And indeed, few countries are as suicidal as America.
As far as savings go, the best criteria I heard was if you want a poor retirement save 0-5%, middle class 5-10%, affluent 10-15%, rich 15-20%, or retire early 20+%.
If you only have a half a career to save, even a poor retirement requires 15-25%, middle class 25-35%, affluent 35-40%, rich 40-45%. If you only have a decade, you would need to save 60+%. With median 401(k)s for 50+ year olds of $23k, and medians for all of $12k, it is already too late.
Holly,
The correct biblical analogy is the Egyptian fellow who stored grain in times of plenty, preparing for bad times ahead. Deferred gratification, it's a virtue worth learning.
It's one thing to experience the kind of misfortune that can't be predicted or prevented. I have no problem with Job relying on the safety net. It's quite another to enjoy a middle-class income and forego saving to support a more costly lifestyle, and then ask me for a handout when you can't pay off the home furnishings you bought on credit. I'm talking about people who could have saved, but didn't.
Bruce Webb--For the most part, productivity improvements in healthcare ADD to costs. Most (although by no means all) technological improvements add health rather than reduce costs. And of course this means people live longer and need healthcare for longer.
republican--Another thing about the high inflation of the 70s is that back in the days when people got 30year fixed rate mortgages and paid them off, the elderly most had their mortgage paid off. Many baby boomers OTOH, had 30 year fixed rate mortgages and inflation meant that in real terms their mortgage payment got smaller every year.
I surmise you buy in that Heritage Foundation crap about those "welfare Queens" cruising around the hood in their Cadillacs too!
Gimme a break with your sanctimonius, paternalistic judgements on the lives of average Americans. They are not your spoiled children, they are, by and large, normal people trying to reconcile the rising cost of things with incomes that are not rising to keep up...quite rational actually.
I'm personally obsessed with why Americans aren't saving any money, but I don't think the answer is quite so simple as "People are strapped and can't save" or "People are just undisciplined and won't save." Pure either/or choices tend to be false choices, IMO, and only serve the purpose of allowing us to avoid the real issues.
Here are some of my musings on the subject:
I suspect one problem is that many people believe they are saving money, because they contribute to their 401k and/or IRA, but don't realize that the money owed on their credit card debt or HEL is keeping their net worth negative.
I think too many people are graduating from college with large college loans, preventing them from saving when they're young, which is crippling in two ways: first, money saved early has alot more years of compounding ahead of it than money saved late and is therefore more valuable, and second, the longer you don't have a habit of saving, the harder it seems to be to cultivate that habit later. (Disclosure: My father is a professor and I got to go to college tuition free; I think the greatest financial gift of my life was not having to repay any student loans.)
I also think that when the message from our government is that the best thing you can do for your country is spend, spend, spend to keep up our GDP, it makes it seem okay -- even beneficial -- for people to be in debt, because they're helping the economy by spending all their money.
I'd like to hear President Bush emphasize that citizens need to start saving instead of shopping, but that's not going to happen. And what will the effect be on our economy if people do start saving for their own futures? Nothing pretty -- consumer debt is what's keeping our 'expansion' going, right?
As a data point, one "defined benefit" plan (that I was vested in)morphed into a purchased annuity when Verizon (nee GTE) finally killed all their "pension" plans.
I expect this behavior from all companies that kill their defined benefit plan for future employment. It will be cheaper than maintaining the vast apparatus necessary when there are no new additions.
Hit the Bird, your comment about rising costs not being matched by rising incomes is pretty straight-on, too, unfortunately.
When I went to the dentist this morning, it cost nearly $8 more than a year ago; my cat's annual veterinary check-ups cost $10 more every year; getting my hair cut has gone up by $8 in the last 2 years; a bar of soap for the lav at work cost me 10 cents more than the last bar; and even bands to tie my hair back, which used to be $2.99 for 24, are suddenly $3.59 for 12 nice ones or 18 not-so-nice ones; and I could go on but I won't.
Even if my rent isn't increased, or my health insurance stays the same, or this winter stays mild and keeps my heating bills in check, these kinds of "little" price increases really add up and keep people from feeling as if they're getting ahead. I guess I'm not that surprised that people don't feel as if they've got money to put aside for the future ... I'm just worried about it.
I would add to you thought on savings by adding that people can still save, its just ridiculously hard now.. there is a great piece in the WSJ today about the poor and succesful programs with IDAs that are encouraging savings. We can save. I hear about the paradox that American capitalism has put us in. With consumer spending now over 75% of our GDP, savings is not good national economic policy anymore.
I have a whole slew of interesting economic data about home equity extraction and other household well being ratios etc..but the real point to make is that progress no longer means "growth" Rhetorically it is very important, but growth in and of itself is meaningless.
How can we modify capitalism so that it achieves more balance with incomes and wealth, balance in international accounts, balance with labor and capital and workers and managers?
Don't we seem a bit out of whack? I don't mean to convey atavism, globalization shut that door long ago. Maybe its because we are on the back end of a mind boggling quarter century...the internet has already been invented...whats next for us to create and lead on?
At the end of the day I can't help but think that America's perennial advantage must be towards Innovation. ..at least while we still have an advantage in higher education.
Hit the Bid,
I am the average American that took loans to go to college and have a job. I see all around me my peers who save zero money and drive new cars, talk on expensive cell phones, and eat out more often than not. I'm aghast. They make the same money as me for the past 10 years and live paycheck to paycheck. I make hard sacrifices to save. I drive a 10-year old car. I don't own a cellphone so I can save $300 extra a year. But a homeless guy washing car windows pulled out a cell phone the other day.
What the hell happened to American values like hard work and saving? It's mainly Asian and Hispanic immigrants that have these values now.
You may find what I have to say paternalistic..well so be it. Probably what I have to say hits you a little too close to home and hence the emotional reaction. Even if real wages are declining SLOWLY, that is no excuse for the savings (or lack of savings) rate we have in the USA from good middle-class incomes.
We are nowhere near a Victorian England situation with abysmal conditions for the lower classes. You don't need me to pay for your pension. Act like it.
See thats just it FoolsMate. The American value of working hard and saving is still alive--it still is an American value and other Americans, like you want to save and work hard.
Where you are off track, I believe, is in thinking that this is a cultural meltdown problem and not one generated by changing economic realities. My dear friends on the right tend to look askance at human nature in this respect...ie that things USED to be better and now modern life has made it all go to crap. The savings rate is now negative...that is a fact...on both the national and personal level.
Now, is this best explained by the fact that you saw a bum with a cell phone or other interesting anectdotal evidence, or because we have millions of households in America who are trying to do more with less? I appreciate the empirical anectdotes, but as a policy analyst, I don't like to rely on them--and neither should you.
Foolsmate, I'm not trying to pick fights with anybody here. I'm deeply worried about America's negative savings rate, and I think it's a terrible thing for our country in the long run, but I just don't see that resenting and blaming individuals is going to help the situation, because IMO, the problem is systemic. I think Hit the Bid has a valid point when s/he says "savings is not good national economic policy anymore." How do you make people believe that saving is a value when virtually all of our economic growth depends on spending? It's a Catch-22.
At the same time, you make a really good point I missed -- all this increased technology seems to me to be making people poorer. I don't think people realize how much money they're spending on cable TV, DVDs, cell phones, computers, DSL lines, and all the other temptations and 'necessities' those things open up.
Like you, I make sacrifices all the time in order to be able to save money. My husband and I don't have cell phones, cable TV, or a DVD player; he has a 12-year-old second-hand car and I don't have any car at all. I sometimes look around and feel like an ant surrounded by grasshoppers, which can make me a bit resentful at times ... but I think those grasshoppers need education, not punishment.
Hmmm...so the new social contract is no job security, no health security, and no retirement security. That strikes me as a bit unfair.
I have been studying the issue of paying for the legacy costs from a past economic time, and this seems to me to be a good time for us all to rally and realize we have a moral obligation to honor what companies now cannot.
If a privatized safety net cannot do it and the system for employer based health and retirement insurance has failed, then a system where ALL social and economic risks are born by the citizen can surely not.
I have to say though that perhaps to get single payer govt insurance and a comprehensive pension system that is portable and people can understand, we might have to endure a period of this "you are on your-own--ership society"...that seems to be the only way to create a natural base of support for it...once people see that there are no real economic benefits of managing their own health and retirement lives...ie big companies will still stick it to them and the tasks are time consuming and difficult---then they will see that we need to all get together on this and design a smart effective health and retirement system/insurance that matches the underlying structural realities of our economy.
I agree with Hit The Bid's comments about the on-your-own society ... and have to wonder a bit whether the average 'conservative' voter really understands what they've signed up for. I don't believe Americans are really in favor of no safety net at all.
OTOH: A defined benefit plan is a disaster from an Employer's viewpoint: It puts one on the hook for huge future obligations, and it is far too easy to promise today-deliver-tommorw and end up with underfunded systems. As an employer, I'd never want a defined-benefit plan.
Additionally, as someone who will undoubtedly change jobs several times, the 401(k)/403(b) lack of vesting model is really benefitial to me. (But admittedly, I'm not the "naive": I've got a diversified portfolio and I'm maxing out my contributions).
It's a really tough problem, how to structure such things right. You want the employer-bottom-line costs of a 401(k), you want the no-vesting model of the 401(k), but you don't want the "naive screwing up" factor, where people do stuupid things (eg, investing in the stock of teh company working for, etc).
Its a tough problem.
CR,
What do you think of automatic enrollment in 401k plans, so that workers have to opt out rather than opting in? I understand that generally people would be signed up to put about 5% of their pay into a default mutual fund, usually an S&P 500 index fund. Would this make any improvement in the poor performance you witnessed, or do you think people would move their money to the money market funds as soon as they saw a bad quarter in the stock market?
CR,
The well-documented problems with private pension plans is only a tip of the iceberg. Wait till new accounting requirements force private companies and, more importantly, state and local governments to disclose their off-balance sheet, unfunded liabilities on account of promised retiree healthcare benefits. It is likely to be especially huge for the latter group. GAO is requiring state and local governments to come up with actuarial estimates of how much these promises mean in NPV of future liabilities. This will make a molehill out of the GM and Dephi pension problems.
One reason why we came out of the stock market bust of the early '00s seemingly unscathed and defying doomsayers is not because Messrs Greenspan et al did a great job but because public and private officials with fiduciary responsibilties have cavalierly swept problems under the rug. In fact, most state and local givernments dont even make any estimates of their future retiree healthcare costs. If these problems had come to light, there would have been more pressure for belt-tightening by state and local governments, more job cuts, more benefit cuts, more tax increases, and in general greater insecurity and greater unwillingess on the part of households to borrow and spend merrily.
Regards
Woe the poor worker. First automaion, then offshoring, next illegals, now pensions.
Good post, CR.
Yeah, the 401(k) nightmare is awaiting more workers.
As HitTheBid observed:
"...the new social contract is no job security, no health security, and no retirement security."
So, what will happen thereafter? Say, 2015-2020.
More from you please, tea.
Not sure if this was already posted, but this blog was referenced in this financial article (near the bottom RE: MEW)
Cult of the Bear, Part 1 | Page 2 of 3 | Innovation Update | Financial Articles & Investing News | TheStreet.com
Holly, IBM is going to contribute a percentage of employees' salary - even if the emloyee doesn't participate. So that is even better than the Opt out plans.
From CFO: Officials also said the company will automatically open accounts for employees who do not contribute to the plan, ensuring 100 percent employee participation in the 401(k) savings plan. IBM will deposit the annual automatic contribution of 1 percent to 4 percent of an employee's salary directly into the accounts.
I'm sure IBM will see the same problems that I saw - but at least everyone will get something.
Nicholas, there is no question this is a solid move for an employer. I moved my company's plan from a terrible defined benefit plan to a defined contribution plan in '92. I actually thought the employees would do better - and the cost to the company would be about the same, but without any hidden future liability.
I was wrong. For many employees the defined contribution plan was better (we had a nice match, and employees could save their own money pre-tax). But for certain employees, it was disaster.
tea, I agree ... the pension problem for state and local governments is huge. I'm not sure when, but I expect we will see local governments moving away from defined benefit plans too.
MG, we will survive - but 2020 will be tough - the mid-age boomer will be in their mid to late 60s and many will be looking at many more years of work (or living on Social Security). I think many boomer retirees (the first with defined contribution plans) will be shocked at how little they will have.
Best to all.
What are the keys to a GOOD 401(k)?
Just starting out:
GOOD defaults: A heavily diversified and robust default choice.
Employer contributions NOT as a match, but automatically and default enroll. EG, what IBM is doing (and what my workplace does). This means that even those who really can't justify a 10% additional 'tax' on their income into their 401(k) will still benefit.
A conversion-to-annuity mechanism on retirement. This is one of the things TIAA-CREF ends up doing, and a good thing because it keeps out the "outlive your pension" problem.
Also, some bans. NO investing in your own company. Period.
Anything else on the list?
I don't believe Americans are really in favor of no safety net at all.
I don't think most middle-class Americans today have the ability to imagine that something bad could happen to them through no fault of their own. (Illness, death, job loss, etc.) It seems most Americans actually believe that it is through their own cleverness, skill and intellect that they are successful. If the other guy is having problems, well, that's due to some moral or intellectual failing on his part, isn't it?
This inability to project the idea that you might actually NEED a safety net yourself someday prevents most Americans from supporting it for other people today.
The Great Depression did wonders for enabling a whole generation of people to get over their concerns about socialism or communism or whatever the heck they were afraid of, and get on with the solution of how to keep people from starving in the streets.
In that sense, the 'Greatest Generation,' as Tom Brokaw likes to call them, got lucky -- their parents learned the hard way what happens when things go bad and there's no safety net, and the Greatest Generation reaped the benefit of it.
Too bad we're going to have to learn that lesson again all over again, the hard way.
I'm not looking forward to it.
great, just more money for the corrupt Wall Street structure. where are the tax incentives if not to give you money to them? employers control where you can put your monies via limited choices in 401k's. what's really needed is a more flexible way to invest your pre-tax dollars. the gov't should allow you to take that $14k max in pre-tax and invest it however you like. the cake is half baked otherwise.
I feel group plans have 2 potential strengths.
Both of these strengths depend on uncertain calculations, but reform can be made within this context. I think guaranteed payments may be difficult, but they can be made on longer term averages...
there are some accounting puzzles here, but I think it true the worker expectations of the past are no longer practical, but a system which engages in professional investment and averages risks and returns is preferable for most.
So now it needs to be designed.
Excellent words of wisdom Semper fubar
the so called 'lesson' you speak of is going to be learned again harshly by many in the near future. Only when the failings and excesses of capitalism collapse- will the needed reforms take place. The longer these excesses play out-the more harsh is the aftermath- and the 'swing to the left' will be defined.
Alan Greenspan can go back to reading Ayn Rand- that fantasy of his paranoid fear of socialism- when he has spawned the greatest fascist economic plutocracy in history-surpassing the Robber Barrons of the late 19th century and that of Calvin Coolidges roaring 20s and 'The business of America is Business'.
Frankly, I don't care if boomers retiring in 2020, who have spent their whole life living beyond their means without considering their future needs, have to live on less for their retirement. At least the 401k system and IRAs put savings and retirement accounts in an individual's own hands, and don't depend on uncertain factors like a company's future success.
I don't mean this in a personal way, but it's really foul that personal responsibility is not a factor here. People are capable of managing their own finances, and everyone can set aside 10%. Govt's proper role is to enable savings and choices and step aside, not to act as some kind of investment nanny. Making poor or risky investments, or not saving at all, are not the vagaries of life, they are concrete choices. People are adults, make adult choices and should live with adult consequences.
Even the 5 year vesting period of 401(k)s is obsolete these days. It should be made immediate.
The retirement consideration these days is not whether you will have enough for a comfortable retirement, that is already out of reach for the bulk of people, but whether you will have more than your neighbor.
Thank you, Foolsmate, for that perfect expression of my point.
I agree with FoolsMate that personal responsibility is an issue, but why should we believe that saving 10% of our income is some magical answer? History is replete with stories of those who thought they had enough (or thought they had it made) only to find out otherwise... the hard way.
The 401K process is in and of itself part of the problem. The 401K only furthers the ongoing centralization of power away from the individual and toward agencies and institutions that the public have little understanding of and thus little control over. This is ready made for the legions of lobbyists, financial gurus and Wall Street high-rollers who have made a career of gaming the system so that they always end up on top.
The 401K won't give us our financial freedom back and it won't make us more responsible.
It used to be that a man made a dollar, spent some of it at his neighbor's grocery store and saved the rest with his local banker, who then lent it out to another local business.. Both the income earner, the grocer and the banker understood their community, its needs and its shortcomings.
This doesn't happen anymore... thanks in part to the great 401K and the incessant centralization of power and influence within money markets.
Wall Street thinks they know better how to spend (invest?) our money... but all I've seen so far is a huge surge in the importation of useless trinkets coupled with a huge export of assets that once made us strong and independent. This together with the ever-expanding big-box retailers who crush every decent local business that ever tried to compete.
I remember that it wasn't long ago when we bought Manhattan for a trunk full of trinkets.
All this talk of Ayn Rand, socialism, communism and fascism is starting to scare me. You'd almost think that people were beginning to question our great American system and its never-ending appetite for centralizing, cataloging and controlling what we once thought was ours.
We'll all need a good bit of luck to survive the new ownership society.
"If the other guy is having problems, well, that's due to some moral or intellectual failing on his part, isn't it?"
Have we oh-so-religious Americans really missed the point of the Book of Job and the words of his 'comforters' this badly?
"why should we believe that saving 10% of our income is some magical answer?"
Of course it's not, but considering the negative saving Americans have been doing for the past 6 months, 10% looks pretty magical in comparison!
"The 401K only furthers the ongoing centralization of power away from the individual and toward agencies and institutions that the public have little understanding of and thus little control over."
Do you have a 401k? or know how one works?
Defined benefit plans are only really useful if they:
1 - treat workers who move around fairly
2 - provide an inflation adjusted annuity at retirement
3 - are properly accounted for and contributed to.
The reality is that most defined benefit pensions provided by private industry have not complied with most of the above. At least with a 401K the worker can control the amount invested instead of relying on the good graces of their employer to contribute to a defined benefit plan. Too many employers did not manage their plans well.
401K's have their problems too but instead of crying for more statist / socialist solutions why don't we address the problems and try to fix them. Give workers appropriate default investment choices. Encourage them to invest enough.
No matter what, in the end pensions/401Ks will only be able to deliver a benefit that is determined by the underlying real return of investments and the savings rate of the participant. No amount of government magic will change this fact.
I think the bigger point here is that individuals no longer feel responsible for their own welfare, and rather, that they have been reduced to the role of some highly specialized "cog" in a larger "gear". So what we have are dis-interested citizens who feel it's "not their job", but rather the job of the govt. This is dangerous thinking.
It's what makes people sit and starve to death waiting for someone else to come and feed them.
With that said, there is no longer a sense of community either because the mentality prevails that the govt will solve all community-based and local problems...again..dangerous thinking. [Why people in New Jersey need to fund a bridge project in Ketchikan Alaska amazes me to no end.]
The solution folks, is never, ever, bigger governement.(be it healthcare, pensions, etc) How about bigger individual participation in your local community instead? If the local people want it bad enough(whatever it is) they'll work for it. You don't need to steal it from the paychecks of people who don't know you, don't live anywhere near you, and will likely never even meet you.
That quote from Job goes both ways, it benefits both the receiver of generosity as well as the giver when it is done face to face. I don't think anywhere in the Bible is compulsory taxation(redistribution of wealth) is ever recommended.
The worker is a sheep waiting to be sheared.
There is no way that your typical worker is armed to penetrate the machinations of a professional broker.
I guess, to every thing there is a season, churn, churn, churn...
One needs a lot of capital to make a professional broker worth your while. The average worker will be investing in a company-managed 401(k) plan and/or an IRA thru ETRADE or similar discount broker.
How hard can it be to research no-load mutual funds, or the typical 10-12 fund choices in a 401(k) plan?
It seems to me that the two key benefits of a defined contribution program are:
Whoops. That's three.
larrydj and Foolsmate:
You are trying to make the case that a worker is an effective investor. This is simply not true.
Investing is a full time job. It is for professionals, not for typical workers. It takes research, knowledge and time. Somebody who has a full time job (or 2 of them) cannot commit the kind of resources required by this activity. To ask them to do this, is tantamount to condoning widespread exploitation.
Then again, I don't think employers should do any investing for their employees because it is best to keep the employers responsibilities as minimal as possible. (That is, provide decent wages and a safe work place. And many employers can't even handle that.)
The problem needs to be addressed by a stronger presence of the public sector in retirement funds. Perhaps a more proactive PBGC.
hmmmm...
a forecast for the future...
With a flatening world - trade barriers down and education up the only costs that will separate us are the costs of transportation, communication and local rules/laws compliance.
Unions - If they want to exist they had better unioinze the rest of the world.
Pensions - CEOs will have one. Who else in the world?
Egalitarian means equal not wealthy or even well-off.
We my be reminded that one reason for the FDR Social Security was the pry older folks out of the workforce to get more work for the younger folks raising families. Now if you have lots of debt and no pension you need a job until you drop.
My main objection to a flat world this week? Currency valuation.
The Asian countries that want their currencies weak and the dollar strong to enhance their export-driven economies are distorting the flatness of the world.
JimMNy
Personal responsibility my ass.
Ive got over 350 employees and the ability to take care of myself and others. But this country runs on the backs of millions of people who have no idea how to research no-load mutual funds, or the typical 10-12 fund choices in a 401(k) plan. My dad was a DuPont pipe fitter for 40 years and would have cashed out all of his mutual funds and gone to money market the day after Black Friday had I not happened to call him first.
It is naïve, if not pure arrogance, to expect the millions of worker bees who make sure the toilets flush and the lights work in this country to also become savvy investors.
Black Monday.
vorpa,
I appreciate your comment about whether workers are effective investors. Actually, that was not a question I was trying to address. Regardless of to whom is delegated the responsibility of investing, I believe a defined contribution program is more financially honest and sound than defined benefits, for the reasons I mentioned above. My post was not meant to restrict or endorse public sector regulations on how those funds would be invested. However, I do believe the public sector should not have access to the funds because of what has happened to the SSI trust fund.
Kirk,
You're missing the point of the Book of Job, too. The moral of the story is that misfortune can happen to anyone, and even a person who has done everything right -- run his businesses well, grown prosperous crops, raised lots of children, saved his money -- can find himself bankrupt and covered in boils, through no fault of his own. His 'friends' tried to claim that he must have had hidden faults all along, but he didn't, and it's not right now, either, when we assume that people who get sick or hurt or laid off are somehow to blame for these problems.
We don't have to dismiss that people should exert some responsibility over their own lives, to the extent that they can -- but as Americans, we used to agree that there was a floor below which we would not let people sink due to misfortune. It doesn't make sense to me that as the world becomes more uncertain, we're deciding that the way to solve our problems is to remove that floor.
"Wait till new accounting requirements force private companies and, more importantly, state and local governments to disclose their off-balance sheet, unfunded liabilities on account of promised retiree healthcare benefits. It is likely to be especially huge for the latter group. GAO is requiring state and local governments to come up with actuarial estimates of how much these promises mean in NPV of future liabilities"
Exactly how governments are supposed to come up with actuarial estimates of health care costs in the future escapes me. About everything I have seen on this has assumptions built in that are more designed to move policy in desired directions than straight out analysis.
As an example the Medicare Trustees have combined an acceptance of the overly pessimistic Intermediate Cost economic projections of the Social Security Trustees (since they largely overlap this isn't a surprise) and couple that with assumptions that there are no conceivable cost-control measures. They underestimate their income going forward, then overestimate their costs and come up with "crisis".
These state and local governments are being asked to come up with health care policy on a battleground where the terms are being set by people with an ideological agenda. People are slowly waking up to the fact that the numbers underlying Social Security "crisis" are bogus. Well those same numbers are carrying through and distorting this discussion as well.
Until we have an honest discussion of productivity going forward we are not going to get anywhere. And anyone who models medical care on the basis that it will increase in cost at the same rate as it has in the past will have to explain why no one in the future will ever perform a cost-benefit analysis and say 'basta'.
There is an ideological struggle afoot. On one side are people determined to convince everyone that all collective, social solutions whether Defined Benefit corporate pension or company supplied medical coverage are by definition inferior to individual, market based plans. And are not particularly scrupulous in the numbers they use to make their cases.
I don't think people are quite so helpless about investing as one might think from looking at 401k results. It's hard for me to judge, though, because I've always found investing interesting; it might be much harder for someone who thinks it's all very dull.
However, I think that companies really need to make an effort to educate employees about different categories of investments (CDs, money market accounts, mutual funds of various objectives and make-up), and try to beat into people's heads that "average" returns have got nothing to do with any one year, and everything to do with leaving your money alone for the long term. I'm not convinced I see this effort at education, but it strikes me as necessary if you want to make people responsible for their own futures. It doesn't take alot of research or time to invest in an S&P 500 mutual fund, but it helps alot if people understand why they're doing it.
I also think that the negative side of the market gets downplayed a little when 401k plans are presented as a panacea for all of our savings problems. I have a reasonably diversified portfolio, but I still lost a huge amount of money in 2001, and even with a combination of constant additional investment and the stock market recovery, I'm only just now back to where I was before the crash. That experience has made me really appreciate the possibility of Social Security to smooth out the rough spots.
We need to remember that almost half of people cash out some money qwhen they roll over their 401ks when they change jobs...that says alot right there...
I don't really care what the savings vehicle is, when you have basically no real growth in income for 25 years, your national savings rate is going to decline if the cost of other things keeps going up relative to what you are making.
I appreciate the financially virtuous who tuck away their 10% smartly each fortnight, but realize not everyone is like you, nor will many become like you--nor should you resent people for that. American working families need to make more money. The wealth affects of the past 25 years have come from asset inflation, not due to a steady, real increase in wages (note the equity run-up in the 1990s and the housing boom of the past 5 years--taken a look at the amount of refinancing activity and HEL and HELOC equity extraction of late??? subtract that from GDP and thats where we realy are as a nation)
How do we get productivity re-linked to wages so we can get real income gains so people can take advantage of great savings options to fund a decent retirement?
In the seventies many elderly people who had saved the old fashioned way were decimated by inflation.
I will also add that as an individual who is able to privately invest a fair amount I don't appreciate allegedly conservative plans to water down my investments for the benefit of the sell side.
Those advocating this provate investment thing are usually too feckless to invest on their own and want others to do it for them.
You've got a point, Hit the Bird. There seem to be two economies in this country, one populated by people who do get decent raises and are able to save money, and the other by people who are living on their credit cards and home equity. It's hard to have a serious discussion about savings if we don't acknowledge this.
And "How do we get productivity re-linked to wages?" When we stop believing that CEOs are the only employees who deserve credit for a company's performance, and stop letting corporations treat wage earners as nothing but "costs."
Bingo Holly W,
But how do we get labor's share of national income back to liveable norms in this era of globalization and wage compression pressures? I have no clue. What i FEAR is that the US standard of living must recede to a new lower equilibrium with respect to the rest of the world...that credit cards, equity market appreciateion and then house appreciation have only delayed an innevitable decline.
Please tell me I am crazy...no seriously. Let me have it.
My cartoon about losing pensions
Look, we are all going to see a return to the good old days when rich people had cheap labor, the average American was WORKED TO DEATH and died before they hit sixty.
This has always been the plan for the baby boomers who voted to have fun today and to hell with tomorrow.
The simplistic solutions to the looming problem of America ceasing to be an industrial and soon, intellectual power is all a waste when one considers that our hatred of socialism has fatally crippled our country.
Note that Japan that is very much more "socialist" than us, keeps out foreign goods and works hard to prevent any foreign entites taking jobs away, this is why they are beginning to fight China!
They aren't sitting idle and letting us take all their industry away, for example. No way.
And indeed, few countries are as suicidal as America.
Hit the Bird, I wish I thought you were crazy -- but unfortunately my fears are running along exactly the same track.
As far as savings go, the best criteria I heard was if you want a poor retirement save 0-5%, middle class 5-10%, affluent 10-15%, rich 15-20%, or retire early 20+%.
If you only have a half a career to save, even a poor retirement requires 15-25%, middle class 25-35%, affluent 35-40%, rich 40-45%. If you only have a decade, you would need to save 60+%. With median 401(k)s for 50+ year olds of $23k, and medians for all of $12k, it is already too late.
Holly,
The correct biblical analogy is the Egyptian fellow who stored grain in times of plenty, preparing for bad times ahead. Deferred gratification, it's a virtue worth learning.
It's one thing to experience the kind of misfortune that can't be predicted or prevented. I have no problem with Job relying on the safety net. It's quite another to enjoy a middle-class income and forego saving to support a more costly lifestyle, and then ask me for a handout when you can't pay off the home furnishings you bought on credit. I'm talking about people who could have saved, but didn't.
Bruce Webb--For the most part, productivity improvements in healthcare ADD to costs. Most (although by no means all) technological improvements add health rather than reduce costs. And of course this means people live longer and need healthcare for longer.
republican--Another thing about the high inflation of the 70s is that back in the days when people got 30year fixed rate mortgages and paid them off, the elderly most had their mortgage paid off. Many baby boomers OTOH, had 30 year fixed rate mortgages and inflation meant that in real terms their mortgage payment got smaller every year.
FoolsMate,
I surmise you buy in that Heritage Foundation crap about those "welfare Queens" cruising around the hood in their Cadillacs too!
Gimme a break with your sanctimonius, paternalistic judgements on the lives of average Americans. They are not your spoiled children, they are, by and large, normal people trying to reconcile the rising cost of things with incomes that are not rising to keep up...quite rational actually.
I'm personally obsessed with why Americans aren't saving any money, but I don't think the answer is quite so simple as "People are strapped and can't save" or "People are just undisciplined and won't save." Pure either/or choices tend to be false choices, IMO, and only serve the purpose of allowing us to avoid the real issues.
Here are some of my musings on the subject:
I suspect one problem is that many people believe they are saving money, because they contribute to their 401k and/or IRA, but don't realize that the money owed on their credit card debt or HEL is keeping their net worth negative.
I think too many people are graduating from college with large college loans, preventing them from saving when they're young, which is crippling in two ways: first, money saved early has alot more years of compounding ahead of it than money saved late and is therefore more valuable, and second, the longer you don't have a habit of saving, the harder it seems to be to cultivate that habit later. (Disclosure: My father is a professor and I got to go to college tuition free; I think the greatest financial gift of my life was not having to repay any student loans.)
I also think that when the message from our government is that the best thing you can do for your country is spend, spend, spend to keep up our GDP, it makes it seem okay -- even beneficial -- for people to be in debt, because they're helping the economy by spending all their money.
I'd like to hear President Bush emphasize that citizens need to start saving instead of shopping, but that's not going to happen. And what will the effect be on our economy if people do start saving for their own futures? Nothing pretty -- consumer debt is what's keeping our 'expansion' going, right?
As a data point, one "defined benefit" plan (that I was vested in)morphed into a purchased annuity when Verizon (nee GTE) finally killed all their "pension" plans.
I expect this behavior from all companies that kill their defined benefit plan for future employment. It will be cheaper than maintaining the vast apparatus necessary when there are no new additions.
Hit the Bird, your comment about rising costs not being matched by rising incomes is pretty straight-on, too, unfortunately.
When I went to the dentist this morning, it cost nearly $8 more than a year ago; my cat's annual veterinary check-ups cost $10 more every year; getting my hair cut has gone up by $8 in the last 2 years; a bar of soap for the lav at work cost me 10 cents more than the last bar; and even bands to tie my hair back, which used to be $2.99 for 24, are suddenly $3.59 for 12 nice ones or 18 not-so-nice ones; and I could go on but I won't.
Even if my rent isn't increased, or my health insurance stays the same, or this winter stays mild and keeps my heating bills in check, these kinds of "little" price increases really add up and keep people from feeling as if they're getting ahead. I guess I'm not that surprised that people don't feel as if they've got money to put aside for the future ... I'm just worried about it.
Thanks Holly W,
I would add to you thought on savings by adding that people can still save, its just ridiculously hard now.. there is a great piece in the WSJ today about the poor and succesful programs with IDAs that are encouraging savings. We can save. I hear about the paradox that American capitalism has put us in. With consumer spending now over 75% of our GDP, savings is not good national economic policy anymore.
I have a whole slew of interesting economic data about home equity extraction and other household well being ratios etc..but the real point to make is that progress no longer means "growth" Rhetorically it is very important, but growth in and of itself is meaningless.
How can we modify capitalism so that it achieves more balance with incomes and wealth, balance in international accounts, balance with labor and capital and workers and managers?
Don't we seem a bit out of whack? I don't mean to convey atavism, globalization shut that door long ago. Maybe its because we are on the back end of a mind boggling quarter century...the internet has already been invented...whats next for us to create and lead on?
At the end of the day I can't help but think that America's perennial advantage must be towards Innovation. ..at least while we still have an advantage in higher education.
Hit the Bid,
I am the average American that took loans to go to college and have a job. I see all around me my peers who save zero money and drive new cars, talk on expensive cell phones, and eat out more often than not. I'm aghast. They make the same money as me for the past 10 years and live paycheck to paycheck. I make hard sacrifices to save. I drive a 10-year old car. I don't own a cellphone so I can save $300 extra a year. But a homeless guy washing car windows pulled out a cell phone the other day.
What the hell happened to American values like hard work and saving? It's mainly Asian and Hispanic immigrants that have these values now.
You may find what I have to say paternalistic..well so be it. Probably what I have to say hits you a little too close to home and hence the emotional reaction. Even if real wages are declining SLOWLY, that is no excuse for the savings (or lack of savings) rate we have in the USA from good middle-class incomes.
We are nowhere near a Victorian England situation with abysmal conditions for the lower classes. You don't need me to pay for your pension. Act like it.
See thats just it FoolsMate. The American value of working hard and saving is still alive--it still is an American value and other Americans, like you want to save and work hard.
Where you are off track, I believe, is in thinking that this is a cultural meltdown problem and not one generated by changing economic realities. My dear friends on the right tend to look askance at human nature in this respect...ie that things USED to be better and now modern life has made it all go to crap. The savings rate is now negative...that is a fact...on both the national and personal level.
Now, is this best explained by the fact that you saw a bum with a cell phone or other interesting anectdotal evidence, or because we have millions of households in America who are trying to do more with less? I appreciate the empirical anectdotes, but as a policy analyst, I don't like to rely on them--and neither should you.
Foolsmate, I'm not trying to pick fights with anybody here. I'm deeply worried about America's negative savings rate, and I think it's a terrible thing for our country in the long run, but I just don't see that resenting and blaming individuals is going to help the situation, because IMO, the problem is systemic. I think Hit the Bid has a valid point when s/he says "savings is not good national economic policy anymore." How do you make people believe that saving is a value when virtually all of our economic growth depends on spending? It's a Catch-22.
At the same time, you make a really good point I missed -- all this increased technology seems to me to be making people poorer. I don't think people realize how much money they're spending on cable TV, DVDs, cell phones, computers, DSL lines, and all the other temptations and 'necessities' those things open up.
Like you, I make sacrifices all the time in order to be able to save money. My husband and I don't have cell phones, cable TV, or a DVD player; he has a 12-year-old second-hand car and I don't have any car at all. I sometimes look around and feel like an ant surrounded by grasshoppers, which can make me a bit resentful at times ... but I think those grasshoppers need education, not punishment.