Tuesday, July 29, 2008


By Nicholas von Hoffman
July 23, 2008

Our disfunctional financial system hit a new low last week when Citigroup, the hopeless wreck of Wall Street, announced it had lost $2.5 billion in the past three months--a cheer went up, and so did the Dow. Only $2.5 billion; people were afraid the losses would be much higher. Happy days are here again.

The Fed scrambles for solutions to the mortgage meltdown--but saving prudent homeowners also involves bailing out a huge number of wealthy speculators. What good is that? There are no happy days for the millions of Americans who have been trying to put away some money for their retirement in tax-sheltered entities like IRAs, Roth Accounts and 401(k)s. For them, the market's downward slope has been harrowing and frightening. When will the steady erosion of their savings end? And when it does, what will be left of their future financial security?

Many of the millions suffering through these worrisome months didn't buy a house they could not afford, didn't speculate on their homes, didn't let greedy impulses lead them to the edge of foreclosure or bankruptcy. Nevertheless, the excesses of their neighbors and the criminal folly of American finance is destroying their plans for retirement. It is dragging down much of the value of their homes, on which they have never missed a payment, homes on which they were counting on selling at retirement to help finance their last years in comfort.

For years, the privatization propagandists have been telling people that when the time comes, Social Security will not be there for them. Now many are learning that it's their private savings that may not be there. They are discovering they have been forced into a system in which other people have, in effect, been allowed to gamble with their retirement savings and have lost it.

The way the private, you're-on-your-own retirement system was supposed to work had individuals, during their younger, working years, investing in stock through tax-sheltered accounts. Almost nobody who is not breaking the law can choose among individual stocks and make money, so future retirees have been encouraged to buy mutual funds run by professional managers, who are supposed to be able to pick the winners.

Most of them aren't much better at doing that than are their customers, but in a rising market, a chicken pecking at stock tables can pick winners. In boom times, it doesn't matter that the future retiree must choose among thousands of mutual funds, many of which carry ruinously high fees. The damage to people's savings goes unnoticed until the market begins to go down.
Even as the market falls, future retirees are told not to panic, to keep their money where it is, because in the long run the value of their accounts will go up and they will have many a happy sunset year traveling the globe and showering their grandchildren with presents.

As the retirement date comes near, they are advised to begin selling stocks and buying fixed-income securities--as bonds are sometimes called--because these pay the interest they earn on a fixed schedule, providing a regular income.

For this to work, stock prices must be high when the holdings are sold and the bonds purchased must pay high rates of interest. But what happens when the stock market is in a nosedive and interest rates are half of the inflation rate, as is the case right now? Panic and worry, no golden years of travel, no presents for the grandchildren. The energy that was to be expended on leisure activities is spent instead trying to figure out how to make ends meet.

The bright spot is Social Security. That check does come with the regularity of the calendar, whether the market is up or down, whether interest rates be high or low and if, as is the case now, the Greenspan-Bush inflation is destroying family budgets. Social Security adjusts for the rising prices.

But Social Security is too narrow a ledge to stand on through the years between retirement and death. It was designed as the base on which other retirement savings were to be built.
Those savings--the house and the tax-sheltered retirement accounts--are shriveling up and blowing away. The persons for whom Americans' savings have been a reliable source of income are the brokers, the lawyers, the account administrators, the whole tribe of Wall Street fee farmers. They get other people's retirement money regardless of the direction the market may be moving in.

You can't call it a broken system because it was a bad one from the start. It is failing, just as its critics said it would. And what lies ahead for those whose retirement savings are gone may be a very unpleasant old age.


BigBear said...

I think that might have been the plan all along.

Anonymous said...

Federal government is looking at a 452 billion dollar deficit, 9 trillion trade deficit.. Their answer ? PRINT MORE!!! As I stated on another blog maybe when we are paying 200 billion dollars for a case of 24 eggs we might get the picture...

riverwalker said...

With ever increasing prices, even the regular inflation adjusted increases to Social Security are not going to be enough to get people through hard times, especially when they don't consider food and fuel prices part of inflation!


Anonymous said...

Ah, now if only they had been successful in privatizing Social Security, then they could have stolen all that money, and all your future contributions as well. As was the plan all along.

Mockum said...

There's nothing wrong with 401k's for retirement. Money is taken out of each paycheck and placed in your 401k into mutual funds, money markets, bonds, etc that *you* selected. If *you* selected mutual funds that went south and lost money then the blame really lies with you. That happened to me too. Over the last two years, I put in about $31,000 into a 401k and now it's worth about $28,000. I'd be down more except that I did put some of the money into bonds and money market funds which while providing a low rate of return didn't lose money (except for inflation of course).

A 401k is no different than any other type of brokerage account. I have a couple of those and I have lost *any* money in them only because I sold all my stock and mutual funds some time ago. My money is sitting in money market funds which until Feb or so were yielding 5%. I was pulling in about $900 a month in interest with no risk. Now the money markets yield is about 2% and I'm only earning $400 or so a month in interest.