Our country is obsessed with retirement. Specifically, investing our retirement savings into the stock market. Should we be suspicious?
After all, it’s not like the average American understands the stock market. You’d think the government would know this and publicize the risk of investing all your eggs into one asset class.
But nope! It’s clearly in bed with Wall Street and for some reason not many folks want to talk about this.
The History of Retirement
Supporting the elderly has been a societal issue for millennia. Records from China’s Han Dynasty show the elderly supported themselves using pawn shops. In Ancient Greece, it was common to stockpile olive oil and then sell it in your golden years, to pay the bills.
Sixteenth- and 17th-century Europeans would form guilds, or fraternities. A person would pay dues in their younger years to be part of the club, and then the club would financially support the member once they could no longer work.
In the United States, early settlers were farmers and lived off the land. When they could no longer work, their families would maintain the farms to take care of them.
Pension Plans Are Invented
Things changed during the late 1800’s, when Americans moved from the farm to the city. In 1875, the American Express railroad company became the first major corporation to offer its employees a pension. By 1960, the majority of all government and private sector workers received a pension.
Pension Plans Aren’t Realistic
Pension plans were great when they worked. But what if a company went under? Or what if it made lousy financial decisions and lost all the employee’s money? The more pensions grew in popularity, the more problematic they became.
To try and help, the government passed the Employee Retirement Income Security Act (ERISA) in 1974 which regulated private pension plans to hold companies accountable.
Unfortunately, the government’s requirements to stay compliant were too restrictive and pensions became too expensive for companies to offer. The once-popular pension plan is practically non-existent today among private companies. State-run and government pensions are still around today but are extremely dangerous and widely accepted as insolvent.
So that is the story of pensions!
Next Idea? The 401(k)
A couple years after ERISA was passed, a small provision to the law was passed which allowed employees to defer taxes on cash bonuses or stock options. It’s unclear why this provision was passed in the first place.
Oh yeah, and it was located in section 401(k) of the IRS code. It did not make a single headline.
This is what happened: In September 1979, the president of a Pennsylvania bank was due a large cash bonus. He didn’t want to pay taxes on the bonus, so he hired a consultant to solve his problem. The consultant, Ted Benna, discovered section 401(k) of the law and used it to legally allow the president to defer taxes on his cash bonus.
News spread, the idea caught on, and the 401(k) was born. Corporations that still had pension plans dropped them like a hot potato in favor of 401(k) plans. The key difference between pensions and 401(k)s was that if anything happened to the money in a 401(k), it is not the company’s problem. The investments purchased through a 401(k) are 100% the responsibility of the employee.
The Rise of Financialization
What we see and hear in the media is rooted in the agendas of corporations and political organizations with deep pockets.
This begs the question: Why the insistence that we invest in the stock market through government-sponsored retirement accounts? Someone is benefiting from this arrangement, and it is NOT the clueless American.
This is who I can think of that benefits:
In 1981, around the time the 401(k) and IRA accounts were taking off, so did the exorbitant rise of Wall Street. They call it the “financialization of America.” When Americans are told to send their money to Wall Street for 30, 40 and 50 years and then penalized for accessing it, Wall Street is clearly the winner.
The Federal Reserve.
When millions of Americans are pouring money into the stock market like clockwork every month, the stock market tends to stay afloat. When the stock market is at all-time highs, the economy looks as if it’s doing really well and the Fed can raise interest rates as needed to help its balance sheet.
Similar to the Fed, the government watches the stock market to see how the economy is doing. It needs everyone to keep contributing so that the market stays up and so that retired Americans have enough to withdraw and live on. If younger people stopped contributing to their retirement accounts, retired Americans would suffer (the stream of money into the markets is what keeps them afloat). The government can’t afford to bail out retired Americans if the stock market goes down.
Public Pension Plan Operators.
Government pension funds are screwed, and they know it. They mismanaged money, inaccurately forecasted returns and made promises they couldn’t keep. They need you to keep contributing to your retirement accounts because it keeps the stock markets up which is essential until they can figure out what the fuck to do about their insolvency.
Overvalued, Over-leveraged Public Companies.
Since 2009, there has been a rapid rise in index investing, which is essentially retirement investors buying every company on the market, instead of hand-picking stocks. This trend has been excellent for companies in trouble. They want everyone to just to keep on buying every stock, because that includes them even when they aren’t worth a penny!
So Why Are You INVESTING for Retirement?
Saving for retirement is obvious. But investing your retirement savings in the stock market? I’m not so sure….
If you ARE sure, then by all means, go for it. For the rest of you, don’t take the bait if you aren’t comfortable putting your money into an asset you don’t understand. You can use the savings earmarked for retirement to buy real estate, businesses, land, and so much more.
There’s one government-sponsored retirement account that gets no attention when I think it should: It’s called “Self-Directed.” The IRS lets us use tax-sheltered retirement accounts to buy practically anything we want, but you don’t know this because the financial services industry would rather you didn’t.
Instead, every month millions of Americans prefer to write a check to invest in the stock market without ever knowing the price, quality or risk of what they’ve purchased.