Almost overnight, it seems, doom and gloom on Wall Street have given way to guarded self-congratulation as the Dow Jones roars back from its 2009 nadir, surpassing its record high of 14,164 set in 2007. But the bubbly isn't flowing just yet. Many have pointed out that the tailwinds behind the rally are largely illusory. Few mention, however, just how much Wall Street's owes its bullish run to systematically pillaging our retirement funds.
There are two main drivers stoking the market's hot streak, neither of them indicators of a robust recovery. First, the Fed's policy of squirting the economy with easy money has kept interest rates low and driven ordinarily conservative investors into the stock market in chase of returns.
The second factor is record profits for corporations. How, you might ask, have big companies fared so well when consumer confidence is at an all-time low? And when real median wage is 8 percent below its 2000 levels, cutting into expendable income?
Economists cite a number of factors behind the divergent trajectories of US workers and corporations, investment in technology and outsourcing foremost among them. But one that gets little airtime is the broad shift from pension plans to "defined contribution plans," e.g. 401(k)s.
That trend's been gathering steam since the introduction of 401(k) in the early 80s. Touted then as the shiny new answer to grandpa's musty old pension, a potent tool that empowered workers to choose their own investments, 401(k)s appealed to the individualist streak in the American character. And, as long as the stock market was chugging merrily along, they worked as advertised.
Then along came the 2009 crash, which vaporized nearly $1 trillion, around 40 percent, of stock value held in Americans' 401(k)s. Suddenly, forsaking the security of a guaranteed, lifelong pension for a savings instrument pegged to the vagaries of the market no longer seemed such a great idea.
After the crisis, the exodus from pension schemes sped up dramatically. Unable to meet their pension obligations without dipping into revenue, blue chips like IBM, GM, and Verizon stampeded for the exits, switching employees to 401(k)s en masse. Unions balked — to no effect. After all, the survival of these firms was at stake, right?
Here we are, four years later, and not only have companies survived — they're going gangbusters. In hindsight, the cost-cutting move towards 401(k)s looks awfully prescient, having helped buoy corporate profits to their largest share of national income — 14.2 percent — since the '50s.
But that maneuver also left legions of financially illiterate Americans in charge of managing their own retirement investments, a task at which even seasoned professionals seldom outperform random chance. The results have been predictably dismal. According to the Fed, a typical household approaching retirement had 401(k)/IRA balances of only $120,000 in 2010. Compare that to the $373,000 a typical individual needs in retirement.
But the loss of workers' retirement security is Wall Street's gain. Until fairly recently, pensions were by law conservatively invested. Not so 401(k)s, which present participants with a menu of funds often skewing towards riskier, high-fee stocks. Thanks largely to the proliferation of 401(k)s, stock market participation has surged (up from 13 percent of Americans in 1980 to 54 percent in 2010). And with more folks forced into playing their hard earned money on the Wall Street casino, traders have reaped a bonanza in transaction fees and gotten access to unprecedented volumes of capital to speculate with. In part, then, the boom times on Wall Street are the culmination of a decades-long campaign to siphon Americans' nest eggs into the market's gas tank.
