Visions Of Sugarplums

     Let’s talk about money:

     Well! If the subject is money, is there really more to say than that? Frankly, yes.

     Relax, Gentle Reader. I’m not about to quote Francisco D’Anconia at you. But he did have a point or two, especially this one: the first thing looters and totalitarians go after, when they get their hands on power, is the money. Corrupt that – put control of it in the hands of the State – and you’ve gained hold of a lever that can move continents.

     Now, as matters stand today, the United States dollar is inescapable. It defines all finance, both inside and outside the U.S. It is controlled by the federal government in concert with the Federal Reserve Bank. Look up the Bretton Woods agreement if you’re interested in the details. With few exceptions, Americans who work for wages are paid in the U.S. dollar.

     Saving itself has become problematic. If you’re saving for retirement, you’re likely to save either in dollars or in equities that are traded for dollars. None of that is likely to change in the foreseeable future.

     Savers must be aware of the changing nature of the dollar. They must also be aware of the legal and regulatory constraints on what they can do with their savings. Today, the dominant vehicles for Americans saving for retirement are the Individual Retirement Account (IRA) and the 401(k) account.

     This morning, the Wall Street Journal has a thought-provoking article on the 401(k) account. In particular, the article notes the psychological effects on employees’ treatment of their 401(k) accounts as they exercise occupational mobility:

     [I]t has become much less common for workers to stay with a single employer throughout their careers. In fact, the typical American holds nearly 13 different jobs before retirement, according to the Bureau of Labor Statistics.
     However, far less has been done to help workers keep their savings on track when they change jobs.
     One major challenge is that millions of Americans end up with multiple small retirement accounts that they have left with former employers. This shouldn’t matter in theory: After all, 10 accounts of $10,000 should be treated the same as one account of $100,000.
     But in practice, that isn’t how people react. As Nobel laureate Richard Thaler has written, smaller windfalls—like those left-behind 401(k) accounts—often are treated as income, and are thus far more likely to be spent. Large windfalls, in contrast, are more likely to be seen as assets that need to be saved for the future.
     This psychology has a big impact on retirement savings. According to research by Vanguard, about 40% of workers with 401(k) balances between $1,000 and $10,000 cash out their accounts upon leaving an employer. In contrast, less than 10% of accounts with balances over $100,000 are cashed out. These larger accounts were seen as assets worth preserving.

     Let’s assume, along with that article, that a typical American wage earner – call him Smith – is likely to change jobs about 13 times during his working life. When Smith changes jobs from one employer to a new one, the previous employer retains administrative control of Smith’s 401(k) account, unless he “rolls it over” into an IRA. However, it’s become depressingly common for Smith’s “new employer” to be unemployment, at least for a spell. That too influences what Smith is likely to do with the money in that 401(k), for obvious reasons.

     While the 401(k) has its limits, it remains by a large margin the most advantageous savings vehicle available to Smith. It would follow that, present conditions continuing, that’s where Smith would be best advised to put his retirement funds. But the unprecedented occupational mobility of American wage earners does put a crimp in matters.

     There’s also this ever-looming possibility, which makes me hesitate to offer an unqualified recommendation of the 401(k). With the national debt now above $35 trillion, Washington’s hunger for (your) money is unlikely to do anything but increase. Remember what they did to the Social Security “trust fund.”

     This brings us to an overarching consideration. Whether it’s in an IRA, a 401(k), or some combination thereof, Smith’s retirement savings are more in the federal government’s control than in his own. Washington could change the rules at any time. It’s done so more than once. Left-wing influence peddlers have advocated all sorts of rules for what IRAs and 401(k)s can do, including forced “investment” in federal bonds. (“A government bond is a certificate of guaranteed confiscation.” – Franz Pick)

     In the mid-Nineties, when I first took interest in this subject, the aggregate value of Americans’ retirement accounts was about $18 trillion. It’s about $38 trillion today. That’s a significant fraction of the aggregate worth of all American assets. The vulnerability of that mass of assets to federal meddling is something that should give anyone pause. Given the mutability of the rules, it should also cause Smith to ask himself “What do I really, truly own?”

     From here I could segue into a discourse on the illusory nature of “real” property, but that’s a subject for another tirade. Anyway, it’s time for more coffee. Back later, I hope.