Because most philosophies that frown on reproduction don't survive.

Saturday, March 14, 2015

Retirement Savings: Holding On To What Little They Have

The other day I was watching some progressives speculate out loud as to whether the stock market should be abolished on the theory that it only benefitted rich people and thus had no social value. I pointed out that a lot of perfectly ordinary Americans have retirement accounts which are invested in either stocks or in funds which include stocks. The reply was that since rich people have most of the money in retirement accounts, those don't really help ordinary people much either.

Now, it's true that Americans do not have nearly enough money saved for retirement. I think of myself as having been fairly conscientious about saving over the years (I opened a Roth IRA when I was 21 and working while going to college, and any time I've had an employer who does an 401k match I've always contributed the max that they'll match), but when I look at this chart, I'm actually close to the "low" end of total savings for my age:

And even that is mostly from the last four years, during which my income climbed to well above the median for a married family.

Here's the actual average 401k value by age group according to data put together by some of the big mutual fund companies.

The article I got these from goes on to say about this:

Every source available says that Americans are not saving enough for retirement. Vanguard recently reported the average 401k balance at year end 2013 reached a record high of $101,650. Not bad, but still much lower than my chart’s guidance of $218,000 to $350,000 for the Low and High End for a 35 year old (the average age of an American).

Meanwhile, other reports show the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households. Supposedly two-thirds of working households age 55-64 with at least one earner have retirement savings less than one times their annual income. Given the median household income is roughly $52,000, that’s not a good sign.

Finally, more than 38 million working-age households (45 percent) do not own any retirement account assets, whether in an employer-sponsored 401k type plan or an IRA. Hopefully these households are diligently saving their money in after-tax accounts and not solely depending on Social Security.

Now, the one thing I would not about average accounts is that if I'm any example, account balance and total savings are not the same thing. If you save via an employer's 401k, you end up with a new account every time you switch jobs. You can then roll those old 401k's into a IRA. But even though I try to stay on top of these things the result is that I have a 40lk with my current employer, a traditional IRA which 40lks from my last couple employers have been rolled into, the Roth IRA that I started back in college, and a 401k from my first employer out of college which has been so hard to get rolled over that it's still sitting out there with the whopping 2,300 that I managed to save (even with earnings of the ten years since) during two years of fairly low wage work. So the average of my four account balances is clearly much less than my total savings. However, no matter how you look at it, a lot of Americans are looking at relying heavily on social security and working longer.

Class warriors would think that this means it would be easy to attack the whole idea of personal retirement savings, take away the tax incentives on them, and encourage people t go all in on beefing up social security and fixed benefit pensions. Because, unions!

In reality, however, cutting incentives for retirement accounts is incredibly unpopular. One theory is that this is because the upper middle class is politically powerful and the broad middle class are dupes. I think a better way to think of this, however, is that people who don't have much can still feel very strongly about it. Sure, if someone making the median married family income of $72k/year has only $30k socked away in his retirement accounts and he's 45, he's in danger of having a pretty tough retirement compared to his current lifestyle (though if he' doing stuff like paying off his house that will help a lot.) But $30k may also be the largest single block of cash that he's ever had in one place to own. Telling him that you're going to take it away from him is gong to make him really angry, and the knowledge that someone making ten times his income has a muck bigger 401k will do nothing to change that.

This is something that in other circumstances progressive are fairly good at understanding: if you have less money, smaller amounts of money matter more. Well, when it comes to why people are fiercely defensive of retirement savings, that applies too.


Michael said...
This comment has been removed by the author.
Michael said...

the notion that something ought to be abolished because it "only benefits rich people" is thoroughly risible from the outset. I'm not sure where that leads aside from some sort of squalid communism.

Of course there's lots of problems with markets (as with any human institution, especially one with so much politics and money at stake.) However, one of the beautiful things I've gotten out of my amateur study of economics (especially listening to Russ Roberts) is the beauty and mystery of the interconnectedness of things and the order that emerges from the self-interest of each.

Darwin said...

Yeah, Russ Roberts has a real gift for getting at the fascinating interconnectedness of the economy. Econtalk is a longtime favorite of mine.

Boonton said...

I'm not sure what 'abolish the stock market' means. Stocks are pieces of ownership in companies, will companies be abolished? Will you only be allowed to buy companies in private sales? I'd chalk that up to 'not well thought thru'.

Also you don't have to buy stocks with a 401K, bonds, even CD's can be put into one. I'm wondering, though, what you mean by the 'average 401k'? It sounds like you are just averaging people that have 401K's while missing those who don't.

Darwin said...

Yeah, there seemed to be no understanding that the stock market was a thing which had emerged through the desire to exchange things owned, it's not as if someone said, "Hey, let's set up this thing with these rules" and done it from scratch.

The data I was looking at on 401ks is put out by the big mutual fund companies that offer 401ks. I believe Vanguard and Fidelity had cooperated on one of the big name reports. So it only includes people who have them, but doesn't necessarily tie together multiple 401ks held by one person.

There has been some research done on what percentage of people have some kind of retirement account, and it's moderately high (I'd have to go looking again), but there are definitely a significant minority of people who have none.

Boonton said...

"Yeah, there seemed to be no understanding..."

This seems to be what I call imaginary liberal syndrome. Who exactly are you talking about? Someone in a coffee shop? On a TV show? Without access to that person we have no idea what their position or level of knowledge is. Many ideas I've heard from the left incorporate stock markets (for example, giving everyone a few thousand dollars each year automatically deposited into an IRA account).

You used mutual fund materials as your source so I'm almost sure they wanted to give the best spin possible on 401K's so used an average of only 401Ks. So sadly the average 55+ yr old does not have a 401K with $150K in it. Many probably have no 401K at all so a better average would incorporate all those $0's which would bring down the number quite a bit.

Darwin said...

It was a conversation on Facebook with Jeff Spross, the author of this article which argues that maybe we should abolish Wall Street.

Boonton said...

He isn't actually advocating abolishing Wall Street there. But he does raise an interesting point, very little stock wealth accrues to those in the lower 99% and it doesn't seem clear that the market itself makes firms any more efficient.

Darwin said...

In the article he just questions whether there's any point to the stock market. The Facebook thread quickly moved into various people calling for it to be got rid of, on the theory that it was only beneficial to the rich, not the common good.

Boonton said...

Fair point, my impression is that most people have no understanding of stocks. I have people ask me things like "company X is at $40 a share, is that a good price?". Beats me, that could be a company with a billion shares and bigger than Apple or it could be your daughter's lemonade stand with just two shares outstanding.

Trading stocks is mostly pointless IMO and actually it adds nothing to GDP (except for brokerage fees). Stocks are useful for companies to get funding so maybe 99% of stock trades are just swapping shares back and forth to make it worth while for the 1% of times they are used to raise funds for investment.

If a stock market didn't exist you'd have to ask how funding would get done. Here I think the financial markets would turn to loans, bonds and other mechanisms. How would company owners cash our or cash in? Perhaps only large blocks of ownership could trade in that case, it would be a bit more like buying a house than tossing a few hundred down on something you have a hunch about.

I do think that income earned from trading stocks should not be treated differently than income earned from any other type of activity. I don't think someone who makes $100 profit on a stock sale should be taxed less than someone who makes $100 working a few hours overtime.