On Faith-Based Retirement

Joe Nocera, a columnist for the New York Times, wrote an op-ed piece Sunday about his retirement account. As he approaches 60 and acknowledges his mortality, he opines that the idea of people handling their own retirement accounts is a bad one. In fact, he quotes a behavioral economist, Theresa Ghilarducci, who said, "The 401(k) is a failed experiment. It is time to rethink it."

What evidence does Nocera cite? Primarily his own experience.  He writes about how the tech bubble that burst in 2000 cut his 401(k) in half. Then, a divorce a few years later, cut it in half again. Then, he says, he threw another chunk of his 401(k) into a renovation on his house. (He doesn't say whether his house value has fallen lately.) 

Nocera is a couple of years younger than I am.  I actually started the process of saving for retirement later than he did, since military service and graduate school didn't provide opportunities to save.  I taught at Miami University for three years, but took my portion out to help with moving expenses to Louisiana, so had nothing accumulated. I spent nine years at LSU and had about $50,000 in a 401(k) when I left. So, essentially, I started saving for retirement about 43 years of age.  I also experienced the fall in the market in 2000 and the more drastic fall in 2008.  Yet, it appears I have much more saved than Mr. Nocera.  Admittedly, I don't live in a high-cost city like New York. But I also haven't written several books that generate royalties, which can also allow one to increase the amount saved in a tax-deferred account.

He suggests in his column that we may need to rethink retirement plans.  Several people commented on his column on-line in the Times. Some were critical of his decisions and others argued we need to return to pensions.  But, have people not read about how many pension plans are underfunded?  One of the major problems of GM prior to its bailout by the federal government was their pension liabilities.  We also know that many states' pension plans are underfunded.  Many still are assuming a 7 or 8% growth rate, which is almost impossible to get right now.  The pensions liabilities of many state and municipal governments are likely to be a huge problem in the future.  Politicians clearly like making promises without worrying a lot about how they can be met in the future. 

Finally, public policy should not be based on anecdotes--either his or mine.  More systematic analysis is needed.  Then there is the question of how much we should be a nanny state and how much we should expect ourselves and our fellow citizens to take care of themselves?

Companies are Still Risk Averse

The Wall Street Journal has an article today about a report cash holdings of nonfinancial firms. Cash holding are up 26% from a year earlier, and the increase is the greatest ever in records that go back to 1952. Evidently, firms are very cautious and risk averse still. I wonder if we have a kind of employers' strike, as some have described the latter part of the Great Depression. There was so much concern by business leaders then over the activism of the government and uncertainty about future policy that they were fearful to increase investment spending and hiring. The current situation is reminiscent of that, but we still have too small a time period to reach such a strong conclusion.

Is the American Consumer Becoming More Prudent?

Consumer credit fell in February, as reported in an article here. Accompanying the article is a graph showing consumer credit for almost 20 years. While reduced borrowing may be linked to reduced spending, and the government would like to see spending increase to help the economy pull out of recession, I think consumer credit needs to fall further. Households need saving to help during unexpected events such as serious car trouble, furnace going out, illness, layoff, and numerous other possible events. Further, longer-term saving for anticipated events such as buying a house, college education, and retirement is prudent. In fact, prudence needs to be emphasized in our economic life. Prudence is a term with a long history in economics. Adam Smith wrote of the virtue of prudence, and, more recently, Deirdre McCloskey describes prudence as, "...first in political and economic and bourgeois value." (Deirdre N. McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce. (Chicago: The University of Chicago Press, 2006), p. 253.) Perhaps the American consumer is becoming more prudent. Then again, it could be a short-term effect due to declining wealth and increased job losses.