I wish John McCain had been with me at the paint store for a lesson in politics, if not in economics. The employee was glum. ‘Yeah,’ he said to the customer ahead of me, ‘a lot of people are not going to retire as young as they thought they would.’
When my turn came, I asked what he meant. He replied that the stock price of the paint company that owned the store had fallen by about a third over the past year. ‘A lot of people close to retirement have pretty much their whole 401(k) in company stock,’ he continued, ‘they are going to be working into their 70s.’
Though I didn’t say anything, my initial reaction was uncharitable. Why on Earth would anyone concentrate the bulk of their retirement funds in one company? Why would anyone close to retirement have most of their money in common stocks at all?
My reaction was unfair. Many people make poor investment decisions in good faith. U.S. schools don’t teach basic personal finance very well. And the plight of people whose retirement funds plummet is real.
I wish John McCain had been there, however, because of his enthusiasm for personal accounts as a replacement for the Social Security system he terms a “national disgrace.”
I’m not crazy about personal accounts, though some people whose judgment I value support them. Such accounts might remove the temptation to fiddle with benefits for political purposes and increase national savings rates.
But the idea is often misleadingly oversold. Enthusiasts argue that everyone could have more retirement income. The reality is that some would, and some would not. The net effects might be positive, but there always would be some losers, especially people like the paint company employees who over-concentrated in one stock, or cohorts of people who reach retirement age during major market downturns.
Economic and philosophical arguments aside, an important political reality governs the issue. Personal accounts are most popular with the public when stock markets are booming. Households with mutual funds and 401(k) plans look at their monthly statements and say “Gee, if all my withholdings were going into the market, I’d really be getting rich.” So personal accounts held great appeal during the dot-com bubble of the late 1990s.
The SP 500 more than tripled from 1989 to 1999. But now, nine years later, it is about where it was in early 1999, and it is down nearly one-fifth from last fall. The NASDAQ composite increased by a factor of 11 in the decade leading up to its high in March 2000. Eight years later, it languishes at less than half of that high.
Of course, risk-averse people could fill their personal accounts with lower-risk, lower-return investments. I’m risk-averse and nearing 60 and my 403(b) accounts have not suffered.
But the political reality remains that the general population’s enthusiasm for personal accounts tends to dry up when people hear conversations in stores that highlight the medium-term vagaries of our nation’s most well-known investment option.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.