What’s a Geezer to Do?Robert Higgs • Tuesday August 21, 2012 12:01 PM PDT •
In 1968, I went to work as a faculty member at the University of Washington. Two years later, I noticed that a large deduction had been made to my monthly pay, and I inquired about it. I discovered that it was my personal contribution to a retirement plan. Because I had no recollection of having signed up for such a plan, I inquired further, only to find out that employees at the university had no choice in the matter. Membership in the TIAA-CREF plan was a condition of employment.
I was naturally outraged by this previously undisclosed imposition and set out to challenge it. I spoke to the resident assistant attorney general, who told me that no one had ever challenged the university’s requirement, so he had no idea how the university would defend itself in court if challenged, except that it might cite the U.S. Supreme Court’s decisions upholding the Social Security payroll taxes in the 1930s.
Determined not to take this robbery lying down, I began to canvass my colleagues in the department of economics. To a man, they thought I was nuts to worry about the matter. Displaying a horrible grasp of basic economics, they thought the system was a terrific deal because the university made matching contributions to the retirement plan on my behalf, so I was, as it were, getting something for nothing. None of my colleagues had any interest in signing a petition to challenge the mandatory withdrawal from the employees’ earnings for deposit at TIAA-CREF. In disgust, I gave up my quixotic undertaking and resolved to swallow the monthly deduction from my pay as one more of life’s injustices.
In due course, my colleagues explained that my retirement contributions would eventually put me on easy street when I retired. Those who knew much more about finance than I did opined that by holding, and steadily adding to, a well-diversified portfolio of stocks, one could not avoid a high long-run average annual return in the neighborhood of 8 percent or so. And one doesn’t have to be a financial genius to see how quickly a sum accumulates at such a rate. Visions of a cushy retirement began to dance in my mind.
For the first ten or fifteen years my visions came nowhere near realization in the market, but starting in the mid-1980s the stock market began a relentless climb that took it to dizzying heights by the turn of the century. The swift ascent in the latter 1990s was especially exhilarating. So even though I had left academia in 1994, and therefore no longer made monthly contributions to my retirement fund, its value had reached an amount that made me feel quite comfortable about my ability to avoid a cat-food diet in my golden years.
All good things, they say, must come to an end. I need not describe for you the gory details of the stock crash that ensued when the tech boom turned to bust. About half of my stock value in the retirement fund turned to smoke and blew away. Not content with this loss, I added another 50 percent deduction as part of a divorce settlement. Easy come, easy go.
Yet, as they also say, hope springs eternal, and sure enough, who should ride to my rescue but the Maestro himself, Alan Greenspan, who goosed the housing boom and the prices of related and not-so-related financial instruments mightily for five years or so. By 2007, my stock values (for such stocks as I continued to hold after the divorce) had recovered their losses fully. Again I dreamed of eating bread and butter, instead of cat food, in my old age.
Of course, that dream, too, was made of smoke (and mirrors at the Fed), and again—this time even more quickly and severely than before—my stocks went to hell. As luck would have it, my pathetic financial instincts had told me at the beginning of 2008 that I ought to get out of (most of my) stocks and into bonds (these are the sorts of adjustments the TIAA-CREF plan graciously permits its inmates to make). This switch saved me a large share of my retirement fund’s accumulated value as stock prices plummeted before and after the onset of the recession.
Now, however, as I peer into the abyss of my financial future, I can make out no clear avenue of escape from my predicament. Even now, stock prices in general, after recovering the greater part of their most recent losses, are no higher than they were twelve years ago, and I will not be surprised if another crash occurs before long. (I’m not giving financial advice, you understand, only mulling over my own situation—which, it would seem, bears a strong similarity to that of millions of other geezers.)
The bonds, which were my salvation in 2008 and 2009, now yield next to nothing, so holding them promises no positive real return. They are nothing more than a place to park some money at seemingly low risk. Ah, but there’s the catch! Ben Bernanke assures us that the Fed has sworn an oath and sacrificed a goat to warrant its promise to hold interest rates close to zero for years to come. Therefore, my bond holdings present great risk of capital loss, because when interest rates do begin to rise—as they must eventually, given that they can’t go substantially lower—I stand to lose mightily.
So, as Martin Luther would say, here I stand; I can do no other without taking great risks, which is not what I’m seeking to do as I prepare to leave the workforce and put myself out to well-deserved pasture. Stocks are risky and probably primed for another crash before long; bonds are risky, too, because the Fed’s shenanigans have guaranteed capital losses to bondholders sooner or later. If I were in this situation alone, you might be inclined to write me off as nothing but a silly old geezer who was too dumb to make proper preparation for his retirement.
But be kind, my friend. Like millions of others, I saved a substantial amount of money for my retirement, however much I did so under duress. I followed the best financial wisdom about how to make investments for the long term: you can’t go wrong with diversified stocks and some real estate, the gurus assured us. Now, however, with my departure from the working class an imminent reality, I have no confidence whatever in my capacity to survive on what I will have to live on. I have decided that, as things stand, my best option is to invest in a boxcar load of cat food.