Friday, April 5, 2013

"Well Off" Seniors - And Maybe Why the 401k Needs to be Abolished.

Perhaps the most superlative financial education I ever received, was thanks to William Wolman and Anne Colamosca in their book 'The Great 401k Hoax', (2002), which offered the best advice on recognizing real returns as opposed to the bubble variety. With their solid arguments they showed, for any given fiscal environment, what a realist investor could expect to make. As they noted, one needed to look carefully at the percentage profits returned by X, Y or Z company. If it is averaging 1.3% a year, then that is the real return you can expect.  The stock hawkers bejabber of 10% annualized returns, or more often, 7 percent, is purely designed to lure the unwary into stock investment.

The authors' arguments were further reinforced about 6 years later in a London Financial Times article (‘A Metaphorical Proposal’, Mar. 13, p. 11A, 2008) by Michael Skapinker. He cited remarks by Joseph Berardino – chief exec of Arthur Andersen- who noted how the existing reporting system “fails to communicate essential information about the real risks facing companies” to the small investor.

Skapinker quoted Berardino as noting how accountants can only issue generic ‘pass’ or ‘fail’ judgments on companies – but never disclose the red ink being bled by a company that’s been passed. (What's referred to as a “bleeding edge” company wherein auditors are actually resigning). As the author notes, to do so would precipitate a collapse in share prices. Duh! (But, tough luck!)

And yet, dear readers, that is the blind financial world that 401k investors are bid to enter. And that more of them will be pushed into if Obama goes ahead and makes the "Chained CPI"  for Social Security a reality (See, e.g.  )

Wolman and Colamosca, meanwhile, paid great attention to how the 401k has been abused and misused, usually by financial shysters - often in workers' companies, but also on the "Street".  Their primary beef? The 401k was never designed as an "investment" vehicle but as a purely savings medium! It was meant to salt your money away in safe, low risk abodes - while being matched by your company to some degree- and all the while not having to pay taxes on it. But almost from the start of the plan, named after the section in the tax code, people -workers were driven to put money into stocks, mainly equities, and other high risk instruments.  Little wonder, that small fry investors in 401ks have been fried and refried, over and over again. Under such conditions, the small investor risks his money and security, by investing in ANY non-FDIC insured monetary device

Michael Lind's recent account in of how the 401k emerged from the reluctance of companies to offer defined benefits plans, should also be required reading for any small scale person - i.e. not of the 1 percent or even of the 10 percent. Lind points out that when Social Security was created in 1935 it was never intended to be the sole means of support for retirees, and the expectation was that employers would make up the difference by providing decent pensions. I mean REAL pensions! Not artificial devices where workers had to save on their own.

As Lind observes:

"The number of private sector workers with defined benefit pensions has fallen from around 40 percent in 1980 to a mere 15 percent today. At the same time, among public sector workers, poor management by state governments, combined with years of economic trouble, has created a crisis for public pension systems in many states.

In order to save money and shift risks to individual workers, employers in the last generation have been switching from defined benefit plans to defined contribution plans like 401Ks. 401K retirement plans and other defined contribution plans, including individual retirement accounts (IRAs), now cover about 42 percent of the workforce as opposed to only about 17 percent in 1979."

Lind adds:

"In these defined contribution plans, savings by individual workers received favorable tax treatment. But the risks, including risks from poor investments and the chance that you will retire during a stock market downturn, fall entirely on the individual. Even worse, many working-class and middle-class Americans with 401Ks are stealthily fleeced by money managers, who charge high and often difficult-to-find fees for allocating retirement money among stocks, bonds and other assets."

Well, this introduces the argument of why have these mutant  contribution "pension" plans at all? IS this the best we can do? Look at this fact, given by Lind:  "One in four Americans, lacking other liquid savings, has been forced to pay for emergencies by withdrawing prematurely from 401Ks or other retirement accounts."

And bear in mind, if that money isn't paid back in a timely fashion there's an enormous tax hit. No surprise, as Lind notes,"the failure of the private alternates like defined benefit pensions and 401Ks has made Social Security by far the most important source of income for most American retirees." 

He notes that according to the U.S. Social Security Administration in 2101, 84.3 percent of the income for Americans over 65 in the bottom income quintile comes from Social Security. Even for the middle quintile, Social Security provides 65.7 percent. Meanwhile, for my wife an myself, it provides roughly 45%. Even then, some maniac pundits consider us "well off" (Yeah, right - assuming one or both of us doesn't get Alzheimers and end up in a nursing home at $3,600 a month!)

One of these nuts is Neoliberal columnist Robert Samuelson. In a notorious column from last year ( 'Well Off Seniors Can Live Well With Less', The Denver Post Business section, May 15, p. 2K),  he argued that:

"trimming benefits for well off seniors isn't just budget arithmetic, it's the right thing to do."

This, of course, brings up the question of how he defines a "well off senior". The first impression I had, without further reading, was one that had an ostensible income of say $250,000/ year (mainly from a defined benefit pension) and also had amassed a net worth of at least $2 million. But on perusing the piece, I saw I was totally wrong and Samuelson's threshold was much, much lower. This then presents a problem if Samuelson's base argument is that "Government over-subsidizes the affluent elderly".

Samuelson began by referencing the government's defined "poverty line" of $12,968 for 2009 for an over-65 couple. Let me say first that, as with the Bureau of Labor Statistics unemployment rate, this income level is low-balled, and I'd say deliberately. By lowballing the poverty line it translates into the government having to do much less for citizens in need, including for an array of benefits such as food stamp qualifications, Medicaid and so forth. But anyone who's done any economics knows this number is farcical. Indeed, its been unchanged since ca. 1969 when the value of the dollar was at least 4 times greater. Hence the more plausible poverty line for a couple today would be around $48,000/year. However, we will go with the lower level of $38,000/yr. advanced by the Economic Policy Institute. The point is, Samuelson's entire specious arguments rests upon an ab initio lowballed number, from which he can lowball all this thresholds of what defines an "affluent senior".

(By contrast, Lind's sober and rational definition of 'well off' senior applies only to the top two income quintiles, the income categories in which are found almost all American political donors, politicians, pundits, journalists and policy wonks. For these rarefied folks Social Security provides a mere 17.3 percent  of the total income for members of the top quintile and a microscopic smidgen (3%) for elderly members of the 1 percent. So it's no wonder these are the jackasses who are salivating most over the Chained CPI).

Back to Samuleson's piece, in which he stated:

"The proportion of elderly living in the high income group- defined as four times the poverty line or almost $52,000 for a couple in 2009- rose from 18.4% in 1980 to 30.6% in 2007"

But again, this is neither here nor there. As I showed, the REAL poverty line, not the lowballed farce, is more like $38,000/yr. even if we are very conservative (since factoring in inflation since 1969 I computed $48,000/yr which $52,000/yr. is barely above). Even at $38,000/yr. this means the retired couple at $52,000/yr. is only one major calamity away from indigence since it's barely 36% above the true poverty line. Indeed, most financial columnists writing on retirement incomes (e.g. in Smart Money magazine last issue), place a couple over 65 with $50,000/yr. income as just barely in the middle class!  AARP statistics, meanwhile, show this amount is firmly within the third quintile or the 'middle of the middle'. It's still a long freaking way from how the well off senior category that Lind defines lives! (The middle of the 2nd quintile, for example, starts at abbout $79,000/yr.)

Samuelson compounded his defective perceptions (which he obviously hopes to pass on to an untutored American population) by invoking "net worth". He writes:

"In 2007, the median net worth (that is assets minus debts) of 65-plus households was $237,000, or about twice the amount of households aged 45 to 54. Among 65-plus married couples, median net worth was $385,000"

 Again,  this misses the point! All it really shows is that the average American of whatever age group is a terrible saver, and this is most likely based on wage scales that have declined absolutely since 1973 - coupled with increased dollar value debasement. To get a more realistic picture, recall net worth factors in the home as well, and we do know most over 65's own their homes. (Which is a move also heartily recommended by financial planners). Let's say the home is nominally worth $100,000 then subtract to get the actual monetary net worth, which turns out to be $137,000 for the average over-65 household and $285,000 for married couples. But this is nothing! Given current over-65s are already advised to have on hand $225,000 to cover expenses and co-pays Medicare won't! That already eats up the total net worth in real money terms of the average over-65'er and most of the net worth (79%) of the married couples! So WTF does Samuelson want? For our "affluent" or "higher income" seniors to live off cat food, along with no vacations ever, and no amenities, period? A life little better than a peon's with no frills, not even minor luxuries? What, is he fucking nuts?

Again, turning to the expert columnists in niche financial magazines, including Smart Money, Money as well as Forbes, the general consensus is that for a senior couple to be able to live comfortably they will need a net worth of at least $1 million, minus the home value! Along with Social Security, according to this lot, they should be able to arrive at an income of at least $75,000 a year! Once more, we see that Samuelson is being dishonest in how he portrays the conditions, but we can't be amazed because they are based on dishonest government definitions, first of the poverty line for couples, and then for the "high income" definition based on this spurious poverty line.

Samuelson's other stat is more or less correct, to wit that ""for the poorest two-fifths of seniors Social Security provides 83% of their income"

But again, that merely shows the desperation of the bottom two quintiles, not that the next highest quintile is living on Easy Street! It shows, indeed, that the bottom two quintiles are living right at the knife edge of imminent poverty, homelessness or worse. Every American ought to be outraged at this, and not merely use it as a basis to take all seniors down to the lowest common denominator - which would indeed happen if Samuelson's plans were implemented.

Perhaps unwittingly, Samuelson provides - by his misuse of economic statistics- the best argument to support Michael Lind's case that we need to EXPAND Social Security, and either cut back or eliminate the 401k. Or, perhaps most sensibly, leave it exclusively for the wealthiest who have the means to sustain market -equity losses over and over, as well as tolerate the highly overcharged fees from 401k plan managers.

But for most little guys, unless they are firmly into safe vehicles like money funds or such, and get their main gains from employer matches only, 401ks are a terrible idea.

Obama, take note! And don't go through with that silly-ass, betraying plan to cut Social Security via the back door! We don't want NO "superlative" Chained CPI, or "semi-superlative". And for christ's sake already, stop bargaining with yourself when  the Repukes aren't even on board!

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