Today’s revelations of the blindingly obvious: Poorer workers are more likely to cash out 401ks when losing their jobs than are executives and professionals. Yet both groups eat, live in shelters, and so forth!
The research: “Nearly Half of U.S. Employees Cash Out Their 401(k) Accounts When Leaving Their Jobs“, Hewitt Associates, 28 October 2009. These consultants worry about the lack of discipline and foresight among the lower classes and young people. Pamela Hess, Hewitt’s director of retirement research, explains:
“Particularly during the economic downturn, employers and financial advisors have been increasingly vocal about the negative impact that cashing out of a 401(k) plan has on retirement savings. But employees don’t seem to be getting the message. In a society where less than 1 in 5 workers will likely be able to meet their needs in retirement, employers and policymakers need to work together to implement solutions that change employee behaviors and reduce cash-out rates. Otherwise, millions of Americans who rely on defined contribution plans will find themselves unable to achieve a financially secure retirement.”
Wonderful advice for unemployed members of the worker class: give up eating, live under a bridge. These are the keys to a secure retirement.
Seriously, nowhere in this does it suggest that unemployed people might need their retirement money in order to survive. Let’s look at some statistics Hewitt’s research team ignores.
From Calculated Risk, % of the civilian labor force unemployed for over 26 weeks. These people have lost not just their jobs, but in most cases their medical insurance, disability insurance, and life insurance (provide though group employee plans for most people). After 26 weeks their savings are often exhausted.
x
Another perspective on the plight of the unemployed, by David Altig (SVP, research director at the Atlanta Fed), posted at Macroblog, 21 October 2009:
In next week’s issue of Revelations of the Blindingly Obvious: Articles in the Harvard Law Journal proves the perfection of the US legal system by showing that both rich and poor have an equal right to sleep under bridges!
To see other other callous, even obtuse, comments about the unemployed
The comments are filled with people denouncing aid to the unemployed. Almost beyond belief.
- Why has the worst recession since the 1930’s had such a mild effect on America?, 14 July 2009
- Update: why has the worst recession since the 1930’s had so little impact on the economy?, 5 October 2009
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp relevance to this topic:
- Posts about Financial crisis – what’s happening? how will this end? – Esp section 8 about solutions
- Good news about America, a collection of articles!
Reference pages about other topics appear on the right side menu bar, including About the FM website page.
Some posts discussing solutions:
- A solution to our financial crisis, in 3 steps
- Stabilize the financial system.
- Stabilize the economy.
- Arrange long-term financing for steps #1 and #2 with our foreign creditors.
Afterword
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Gee! Why can’t they just eat cake instead?
Worse, for MOST, the 401(k) has been a nightmare overall:
* “Should the 401k Be Killed?“, Time, 4 December 2008
* “Why It’s Time to Retire the 401(k)“, Time, 9 October 2009
The 401(k)/403(b) is designed for the >100K/year set to be able to squirrel away $15K/year tax free, and to have your employer kick in another $10K-15K without having to pay social security and medicare on that. If you are in the situation, the 401(k) is brilliant.
But if you are not, its pretty much a disaster. Its not like they are cashing in all that much anyway, at least not enough to have a truely secure retirement. EG, if you are 65 and want a $20K/year guarenteed income until you die (a lump-sum annuity), you need to shell out ~$250K.
How many people have $250K in their 401(k)?
.
.
FM Note: From the Fed’s 2007 Survey of Consumer Finances:
* The median value of retirement accounts for those in the 3rd quintile was $7 thousand, for the top decile was $45 thousand.
* The median value of all financial assets for those in the 3rd quintile was $8 thousand, for the top decile was $144 thousand.
* The median value net worth for those in the 3rd quintile was $88 thousand, for the top decile was $1.1 million.
* The median value of retirement accounts for those in the 3rd quintile was $7 thousand, for the top decile was $45 thousand.
* The median value of all financial assets for those in the 3rd quintile was $8 thousand, for the top decile was $144 thousand.
Thats actually even worse than I thought. Not for the 3rd quintile (Thats the top 50% to the top 25% for the stat-class-long-ago), I’d epect taht to be ugly.
But that the top 10% has a median of $144K in financial assets (and only $45K in retirement) is even more ugly than I thought: the top 10% (as opposed to the top 1%) may be house-rich but are sure money poor.
So even for the top 10%, the 401(K) has really benefitted a suprisingly small subset. Owch.
.
.
Fabius Maximus replies: Part of the problem is the low returns during past decade. Near-zero for equities and low for bonds (thanks to the Fed). Part of our low savings rates may result from low returns to savings.
Also, the “rich” in America are poorer than most realize. In 2007 the median income for the 80%-90% income decile is $114 thousand. In NY, LA, or San Francisco, that’s not easy living. Taxes, mortgages, private schools (or high property taxes to fund good suburban schools), and children’s college expenses drain that away in an eyeblink.
The median income for the top 10% was $207 thousand. People have no idea how concentrated wealth and income are concentrated in the USA.
This may not be regarded as good news, but please don’t kill the messenger; I am not exactly happy about it, either – namely that retirement of the kind experienced by Americans over age 65 since WWII is a historical anomaly.
Most people in most times of history, have to work for all but a small proportion of their adult lifespan, until infirmity or death. Human societies have largely been structured such that the rising generation will care for the aged, as they themselves were cared for as children. Children were, in a very real sense, an economic and not simply an emotional investment, and insurance for one’s old age.
Consider my uncle, a retired USN officer. He has been retired and living off his government pension since the early 1970s; he is 80 now. That’s a thirty year retirement; something we are likely to see less and less of in the coming years. My parents have ad a long, prosperous retirement, as have many of their peers.
They were fortunate enough to live and work in an era when the USA enjoyed a long post-war economic boom, unique in its history. The competitive advantages
we enjoyed in those years, and our wealth, are – as FM has pointed out many times – coming to an end. Or so the signs seem to indicate. I’d love to be mistaken.
I just do not see the bulk of retirees to come in the next 2-3 decades, living this well.
.
.
Fabius Maximus replies: Agreed. The combination of the post-war economic boom and the baby boom allowed this. Of the two factors, the latter is the more important. The past years saw something with no precedent in history: the young subsidizing the old, a massive income transfer. The result is that the boomers enter retirement relatively improverished, their parents having spent what the boomers would otherwise have saved. We, the boomers, were stupid. Our parents, rapacious when fighting to expand their benefits (speaking to groups of retired people about this is one of my most memorable experiences, reminding me of the harpies in the movie “Jason and the Argonauts”).
George Orwell would be impressed by the administration’s performance.
Best Regards,
PoliticalPen
Ah . . .
FM: “We, the boomers, were stupid. Our parents, rapacious when fighting to expand their benefits”
So much for “The Greatest Generation.”
.
.
FM reply: Agreed!