Once again people with 401(k)s are getting hammered by the stock market. The Dow may be up one day, down the next and up yet another day, but it’s been a bad year for most people’s portfolios. As Congress talks about long overdue regulation of Wall Street, you can bet that the artifice of 401(k)s won’t be on the table.
That’s too bad, because America is headed for a wave of impoverished baby boomers. It may not be a big one, because many will inherit the wealth of their parents. But each succeeding generation will be a little poorer. There may be more wealthy, too, but the majority will see declining living standards. It’s all so Gilded Age. And few have thought through the consequences.
In history poor America, fewer and fewer people remember the great wave of the middle class that crested in the 1970s. It brought secure jobs, career advancement, benefits and, importantly, pensions. These were secure retirement nest eggs paid by companies as part of an employee’s compensation. They were not directly dependent on the stock market. This is why the S&P 500 could be essentially flat from 1965 to 1983 but middle America did fine.
Everything started to change in the 1980s, as companies moved en mass to 401(k)s, promising employees a great deal on Wall Street. This was not the hidden hand of the market, but industries that lobbied hard to unload their pension obligations and get tax breaks for the new plans. With government’s help they weakened the unions that had been an essential check on corporate power. They were not obliged even to match the employee contributions. Suddenly, with no vote and little discussion, a key pillar of the middle class was starting to crumble. Now, 25 years later, pensions are rare.
Employees are responsible for their retirement security to a degree not seen since before the Great Depression — they just don’t realize it. More sobering is that their nest eggs, if they choose to build them instead of being "consumers," are dependent on Wall Street. Some have done quite well in two bull markets. But consider the two things that most fueled those bulls: bubbles and the dismantling and consolidation of whole industries. The bubbles kill nest eggs when they burst. The destruction of wealth and good jobs it took a century to create can’t be endlessly duplicated.
People forget that for decades stocks had value because of their dividends, not their continuous upward price movement. If that upward movement is based on forces that are unsustainable, then Shareholder Nation is screwed. We also must not forget how much of the money made by cashing out this real wealth went to CEOs, on an astronomically higher level than ever before 1981. It is no coincidence that wages have stagnated the past eight years, and the only hopeful math the "conservatives" can throw back depends on including the huge gains of the very rich.
The world of pensions and the old middle class was based on real work, producing real things. We’ve killed that world. The new world of 401(k)s is based on unsustainable bubbles and "creative destruction" as more Americans are pushed into marginal service jobs. Some have done very well as a result. Most will face a serious reckoning. It’s been concealed by the housing bubble and the hyped babble about stocks. But it’s coming.