We passed a dark milestone: more money came out of 401(k)s than went in

Summary: Lost in yesterday’s festival about the latest meeting of America’s central planners (wielding tools that Kings of the pre-modern world would envy) was a small article in the Wall Street Journal announcing that we have passed a small milestone on the road to a harsh future.  {1st of 2 posts today.}

WSJ: funds flowing out of 401(k)
Wall Street Journal, 16 June 2015.


America passes an important inflection point

The boomers pass through America like a sheep through a snake. In our wild and crazy younger days we dragged the nation into miniskirts and riots. In our old age into censors on our language and behavior.

Our effect on prices has been equally large. What we buy goes up in price. What we sell goes down. Our long journey into adulthood has put wind into the sails of home and stock prices. Our retirement will turn us into sellers of these assets, with the smaller and poorer generations following unlikely to replace our buying.

The Wall Street Journal reported that we have hit the next milestone on this path, as the decades long tsunami into 401(k) plans turns into a slow ebb tide when people retire, rolling over their 401(k) accounts to IRAs. Although this has little impact on markets, it is another step to the day money begins to flow out of retirement plans. We don’t have long to wait. The bottom 80% of Boomer’s have only small sums saved; many have only small pensions (or none) — and will begin withdrawals immediately after retirement is forced upon them either from disability (white collar cowboys have no idea how quickly bodies wear out from a lifetime of physical work) or inability to find a job.

WSJ: 401k assets flow out
Wall Street Journal, 17 June 2015.

This change in the US savings rate will affect every aspect of the economy, in ways difficult to imagine. Especially if prospects for the generations following them don’t improve. Corporations have found how to limit the increase in wages with age. They have crushed the unions and transformed a large fraction of their labor force into people whose work is contingent, part-time, outsourced, or independent contractors — all with the ever-present threat of having their jobs shipped overseas.

For more about this see As boomers retire they create a drag on US GDP that will last for decades.

This powerful but complex graph shows our future

Unfortunately, the coming slowing will hit a US economy already in slow-growth mode. The Federal Open Market Committee publishes the forecasts of US long-term GDP growth made by the regional Fed banks: the below graph shows their trend through the June meeting. The light gray area shows the full range. The dark gray shows the core forecasts. The line shows the average of all forecasts. The trend has been down since the bounce after the crash ended in 2010.

Federal Reserve staff forecasts of US long-term GDP growth
From Bank of America economists, March or April 2015.

This does not include recessions, let alone hard crashes like 2008 — which pushed the trendline of GDP growth down. If correct, we have hard times ahead of us.

Age Wave

The revolution is coming

America is a nation geared for growth. We have millions of people expecting better years ahead Immigrants flooding in — a guaranteed source of trouble in a stagnant economy, as they decrease per capita income. Plus every sector — household, business, and government — has a large debt load to service, which becomes difficult without a nominal growth rate at least as high as the interest rate on the debt.

A long period of slow growth will upset many boats. Interesting times lie ahead, but nothing we cannot handle if we hang together and act smart. W appear to have lost the ability to do either.

Jeb Bush setting himself a goal of achieving 4% real GDP growth — a bold goal beyond the state of economic science. Growth in the past 40 years has been 2.8%, and only 2.0% in the 25 quarters since the end of the recession.

But the poet Robert Browning said, “a man’s reach should exceed his grasp.” If Jeb consults good people he might find some sound ideas, which would show that he might be a good president (he would become a great one by winning and then achieving faster growth). I suspect that instead he’ll advocate ideas from the Right’s faux economics, or follow Obama and ignore that goal once in office. His economic record in Florida was unimpressive, presiding over a housing bubble that he mistook for prosperity.

But it costs nothing to keep an open mind, and to hope. At least Jeb Bush has made a good start to his campaign, in this respect.

“So many challenges could be overcome if we just get this economy growing at full strength. There is not a reason in the world why we cannot grow at a rate of 4% a year. And that will be my goal as president – 4% growth, and the 19 million new jobs  that  come with it.

— From Jeb Bush’s announcement speech.

For More Information

We were late to see the effects of the Boomer’s aging. One of the first was by psychologist Ken Dychtwald: Age Wave: How The Most Important Trend Of Our Time Will Change Your Future. One of the best is by economist George Magnus’ The Age of Aging: How Demographics are Changing the Global Economy and Our World.

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about demographics, and these about the future of economic growth…



13 thoughts on “We passed a dark milestone: more money came out of 401(k)s than went in”

  1. I think your spellchecker is playing tricks on you.

    Good old Raegan and his 401Ks.

    Noticed a few statements that I don’t think you meant. Forinstance: “like sheep through a pig”
    and “party-time” instead of part-time.

    There may be more since I haven’t finished reading your very excellent and useful article.

    Enjoy your thoughtful and interesting articles.

    1. chuck,

      Thanks for catching those! I fixed them. That’s greatly appreciated.

      My part-time proofreader (full time as my wife) was out with the girls, and so just finished her review of this.

      I don’t see anything about Raegan and his 401(k). What are you pointing to?

    1. John,

      Thanks for the link. It’s always good to see people pushing the intellectual borders that constrain us.

      There is one sentence I disagree with: “The intellectual limits of the unenhanced human mind have now been reached.” While I expect human-computer combinations will open new realms of thought, I doubt we have scratched the surface of what the Mark One mind can do.

  2. It would be useful to see the figures on inflow and outflow to and from IRAs over the last few years.

  3. I ask myself, why is this type of aging demographic news so hard for those “in it ” to understand? Why the seeming unacknowledgement of the futility of wishful thinking after a point?
    Happy days are not on the horizon.


    1. Breton,

      In my experience, economics is too abstract for most people to grasp. The changes that are headlines in the papers are invisible to most people — a 5% increase in the CPI, or rise of 2% in unemployment — lost in the far larger swings in the numbers that directly affect their lives. Journalists attempt to make these perceptual to people by interviewing individuals. Which works, but are essentially false. There are always people losing their jobs, even in a boom. Some prices are always rising or falling. Worse, high level economic numbers are abstractions (e.g., CPI, GDP), not like apples that you can count).

      Climate science has the same problem, with the natural variations so much larger than anthropogenic factors (that doesn’t deny that there are large anthropogenic effects, just stating the obvious that they are larger than the tropical storm that just wrecked your home). My favorite example is a guy who said he could see the effects of the 1% (at most) increase in global temperature by looking at plants in his area. Not likely.

      Demographics have all of these problems, plus an even higher level of abstraction.

      “happy days are not on the horizon”.

      Nothing is written. The future is up to us.

  4. With your all but gushing praise of Bush in this posting and of Limbaugh in a recent one concerning climate change, your true right winger bias had become most apparent.

    While I will continue to occasionally read your posts to get whatever insights and/or alternative views you may (or may not) have to offer concerning at times controversial topics (e.g,, climate change, economic forecasts, military matters, etc,), I must say that I have now lost all faith in FM as an unbiased and objective source of information and analysis.

    ‘Tis a pity…

    1. bryan,

      How handsome you look in your blinders! And they give your speech that fashionable cartoon-like view of the world. Your side are all super-duper wonderful; your opponents never say anything right or good.

      (1) “gushing praise of Limbaugh in a recent one concerning climate change”

      I see no such post using Google. Quote or cite, please? In any case, my mentions of Limbaugh have been quite brutal. How nice if I said at least one nice thing about him!

      (2) “gushing praise of Bush”

      Let’s play the tape: “But his words are just good sense, both about religion and science.” That’s gushing praise? Your blinders are fastened too tightly.

      (3) “lost all faith in FM as an unbiased and objective source of information and analysis.”

      Seldom have I seen a sentence showing so little self-awareness. Suggestion: take the blinders off for 5 minutes. It will be like Dorothy seeing Oz for the first time — in color! You’ll see that even Republicans sometimes say sensible things! This will rock your world.

      (4) “tis a pity”

      How odd. That’s what I feel for you.

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