The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream by Jacob S. Hacker

Author:Jacob S. Hacker [Hacker, Jacob S.]
Language: eng
Format: epub, mobi
Publisher: Oxford University Press
Published: 2006-10-08T22:00:00+00:00

The 401(k) Bait and Switch

At the end of the 1990s, Americans could legitimately have many doubts about their retirement security. But one thing that nobody with a defined-contribution pension plan to his or her name could doubt was that the stock market had been beneficent.

Between 1994 and 1999, the Dow Jones Industrial Average increased from 3,600 to more than 11,000. Like the fortunate child born into wealth, the 401(k) was fathered at the beginning of an almost twenty-year period of unusually consistent and rapid stock-market growth—an anomaly that is unlikely to be repeated anytime soon. Surely there could not have been a more auspicious environment for Ted Benna’s brainchild to take root and grow.

All the more remarkable, then, that as 401(k)s grew like Topsy and the Dow soared, the retirement wealth of most Americans hardly rose at all. In fact, the median American family headed by someone aged forty-seven to sixty-four saw its retirement wealth fall significantly during this period. So at odds with received wisdom is this statement that it must be repeated: Over the fifteen years between 1983 and 1998, the typical family approaching retirement saw the wealth earmarked for its retirement decline, not rise. The stock market skyrocketed, 401(k)s exploded, but the typical family saw its retirement wealth drop.

To be sure, defined-contribution accounts grew handsomely during this period, especially in the 1990s. Yet, at the same time, median defined-benefit holdings declined as employers stopped offering defined-benefit plans. So too did expected Social Security benefits, thanks to the cutbacks in Social Security passed in 1983. When all the gains and losses are added up, the median family approaching retirement—that is, the family exactly in the middle of the retirement wealth distribution—ended the 1990s with 11 percent less in retirement wealth than the median family had in 1983. And the story gets worse. The proportion of near-retirement families that are likely to live on less than half of their prior income in retirement increased substantially between 1989 and 1998—from less than 30 percent to more than 40 percent. In other words, more than two out of five families nearing retirement are likely to be living on less than half of what they are living on now—a sharp increase in less than a decade.30

If these results prompt incredulity, rest assured: this is a natural response. Throughout the bull market of the 1990s, commentators crowed that contemporary 401(k)-empowered Americans were the first to truly share in the fruits of the stock market’s bounty. In one sense, the claims were true: More Americans than ever invested in the stock market through their retirement accounts, but what was often left out is how unequal the scale of these investments was.

We are told that the “average” American has tens of thousands of dollars socked away in a 401(k), but in fact roughly three-quarters of account holders have less than the widely cited average of $47,000. The median among account-holders—which is a better measure of what’s typical—have around $13,000.31 And all these figures include only

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