I just had this thought while driving into work. My post earlier today was about "real life economics" vs. the textbooks, and that basically what works best for me would crash the global economy if everyone else did it. On that same theme, I had a thought flash into my mind that we might be in for a far worse crash in just a few years when the next big wave of Baby Boom retirees actually try to retire. It's not a new thought of course, see Salon's article on pension thefts
, but it does have I think a slight new wrinkle.
Imagine that you have been saving some fraction of your salary for 25 years into a 401k or IRA. Now you're retired and make your financial plan. Let's say you put $200 in every month, your company matched at 50%, you got 8% return (which is unrealistically good), and consumer inflation was only 3% (which isn't too far off). After 25 years you have about $300k in there (~$145k in year 0 dollars). Your retirement plan is to pull $25k every year, which should be about $22k in interest and $3k in principal. You can be retired for 20 years and still pass on $220k to your grandkids. Sounds nice and responsible.
When you pull $25k that first year, your principal drop by $10k that year: $7k of value is lost for no good reason. The next year you pull $25k and your principal drops by $15k: $12k is lost for no good reason. The next year you pull $25k and see the principal drop by $35k. Imagine your horror when you realize that your retirement is being held hostage by Wall Street. You're screwed if you cash out all at once, but then if you try to take out regular payments it might be gone anyway. Whatever you do, there is no way to get your $200 per month for 25 years (!) back.
This is the future I see:
- When the retirees start to actually pull their money from their "funds", they'll see that those funds don't maintain their price ("value") at the rate they were supposed to. They'll have a choice: cash out everything and stick it all in a savings account, or eat through the principal at a rate 2-3x what it was supposed to.
- When too many people in one 401k/IRA fund cash out, the whole fund is declared insolvent and no one else in that pool gets anything.
- When most people in the fund take their regular payments, the fund remains solvent but the payments slowly dry up until the retirees get far less than minimum wage, becoming massive financial burdens on their living relatives.
- Pension funds face the same choice: pay out their beneficiaries at a sharply reduced rate, or go belly up all at once.
- The return of four generations living under one roof.
- The elderly suicide rate going up sharply.
- A rash of people in their 30's and 40's take out 401k loans and then strategically default them in order to clear up their other debts. They pay off their mortgages, cars, and school loans while the money is still "there", since it won't be there to retire on anyway.
- The government is forced to restrict people's ability to withdraw the funds to preserve the global economy. The law is changed to make a 401k loan visible on credit reports, and unable to be discharged through bankruptcy (yes this makes no real sense, since the creditor for a 401k loan is the same person declaring bankruptcy in the first place).
- Marx starts laughing from his grave as the American people come to realize (again) that Wall Street has become a machine that systematically destroys money rather than let the small fry get their promised investment returns back.
All it takes for this future to happen is that a 401k/IRA doesn't have a guaranteed price on its principal. Which we already know is true.
Sometimes being INFJ is depressing.