April 16, 2006


Nest eggs expand with 401(k) funds (Donald Lambro, April 16, 2006, THE WASHINGTON TIMES)

An obscure paragraph added to the Revenue Act of 1978 by an unknown author has drastically changed the way Americans save for retirement and, possibly, how they vote.

Over the past 25 years, since a 38-year-old retirement consultant in Philadelphia got IRS approval to establish the first tax-deferred account system, 401(k)s have exploded, dramatically increasing the nation's investor class and boosting individuals' total savings.

Economic and political analysts say 401(k)s have enriched millions of American workers, particularly lower-income people, and their longer-term impact on the economy, especially investment capital formation, and the electorate is now coming into fuller view. [...]

One of the most surprising conclusions by economists studying the growth in 401(k) accounts is that they have contributed to a sharp increase in private savings, a view sharply at odds with reports showing that the savings rate has been declining for years.

But many economists say that the government's savings yardstick does not measure the full extent of individual savings in stocks, which are becoming an increasing part of retirement nest eggs.

"There is an ongoing debate about how much 401(k)s have increased savings, but there is now a belief that it has increased savings, particularly among lower-income households," said Sarah Holden, an ICI economist.

Putting money into a special fund that is invested over a long period of time "means something to a person's behavior in terms of what you are going to buy. If you have an account that is labeled 401(k), you look at it as something that is not liquid and that you can't spend today," she said.

Miss Holden's studies of 401(k) investors showed them to be "a tough crowd who stick with it through thick and thin in bear markets. They are accumulating significant [savings] balances," she said.

Mr. Beach thinks the true savings rate in the U.S. is at least 15 percent when money being put into 401(k)s and other tax-advantage investment vehicles is added to traditional savings measures.

"Mutual stock funds are all counted as investments even though they are savings. You're talking about $4 trillion in actual savings when you lump all this together. I think the savings rate is really high," he said.

A nation with $52 Trillion in Net Household Worth and no savings is too idiotic a notion for even economists to believe for long.

Posted by Orrin Judd at April 16, 2006 8:39 AM

Mr. Beach thinks the true savings rate in the U.S. is at least 15 percent when money being put into 401(k)s and other tax-advantage investment vehicles is added to traditional savings measures.

Meaning that all this blather we've been subjected to about "Americans don't save" is based on the statistical absurdity of simply ignoring 401)k)s?!? That's as bad as measuring poverty while ignoring income from various welfare programs. (Not to imply that it makes anyone rich, it's just that it's misleading to say "this poor family must live on only $X per year" without counting welfare, food stamps, subsidized housing, etc.)

Posted by: PapayaSF at April 16, 2006 2:39 PM

Capital gains should be considered when analyzing the financial health of the nation, but retirement accounts and home equity aren't the same as, nor as useful as, cash accounts.

It's like having a year's supply of food in the house. It's a "savings", and a safety net, but you can't pay for gas with cans of tuna.

Also, the value of stocks and home equity can halve, or even disappear entirely, in the blink of an eye.

Posted by: Michael Herdegen [TypeKey Profile Page] at April 16, 2006 7:47 PM

"you can't eat gold"

i lived off home equity for a year and a half and still increased my net worth in the interim. thank you gwb!

Posted by: toe at April 16, 2006 8:56 PM


That's silly. The question isn't liguidity for the young but savings to be invested in the economy and to fund retirement.

Meanwhile, there is no situation where accounts and property values would be halved but liquid assets would remain.

Posted by: oj at April 16, 2006 10:56 PM

Funny, that's exactly what happened in 1987 in the stock market, and in the '90s in SoCal real estate, and a dozen other examples.

My cash still spends the same as ever; how are your Pets.com stocks doing ?

Posted by: Michael Herdegen [TypeKey Profile Page] at April 17, 2006 12:11 AM


Fine, neither our property nor our 401ks fell by a half or 100%. Neither did yours.

Posted by: oj at April 17, 2006 12:14 AM

The larger point is that assets are not savings, they're one step removed from savings, and they cannot be treated in the same way.

They should be taken into account when looking at the larger picture, but the value of assets cannot be definitively determined until they're sold.
They also don't directly promote increased productivity in the economy, unless they're capital goods, until they're sold.

Posted by: Michael Herdegen [TypeKey Profile Page] at April 17, 2006 12:23 AM

Sure, but cash isn't savings either. It's just paper.

If you had 10k in cash and I had a 10k house in 1972, which of us had more in 1982?

Posted by: oj at April 17, 2006 12:29 AM

I dunno, I assume that you came out ahead.

But what if I had $ 200,000 in cash in 1992, and you owned a SoCal home valued at $ 200,000 ?
Who was ahead in 1996 ?

I would've been way ahead.

All I'm saying is that America's $ 52 trillion in Net Household Worth is A Very Good Thing, but it should not be seen as the equivalent of $ 52 trillion worth of money market accounts.

In ten years we may be worth $ 60 trillion, or $ 40 trillion, and the more that people need to draw on that net worth, the less they'll get for their assets.

Book value is not market value.

Just keep in mind that the nominal value of America's Net Household Worth isn't a sure thing.

Posted by: Michael Herdegen [TypeKey Profile Page] at April 17, 2006 12:52 AM

Do any of these models account for money market accounts which are part of brokerage accounts? Where people park their money in between trades?

If I decide to sell energy stock, thinking the market has topped, then how does my $XXX of stock change into $XXX of savings, and then back again in a couple of weeks (or months) when I decide to buy something different? Granted, an asset can decline in value, but many energy stocks have increased 200%, 300%, even 500% since 2001. No 'asset' has declined like that, except for paper bags like Enron. And liquidity won't be an issue, unless the market has already imploded.

Also, some assets, like REITs, have appreciated nicely over the past few years, but the primary reason people bought them was for the dividend (5% or 6% was pretty good in 2002, with money funds paying 2.5% or less). How are dividend 'savings' accounted for? And what about re-investment? Obviously, that does more to power some accounts than appreciation or interest ever will.

Posted by: jim hamlen at April 17, 2006 9:02 AM


The point is you have to narroiw down the geography and time frame so far as to make your example trivial. In the type of collapse you're claiming, where property and stock fall 50% generally, everyone's cash will be gone too. Those assets are as safe as cash.

Posted by: oj at April 17, 2006 10:13 AM