[Corp. Watch] Stocks have always been a racket - why rely on them for your old age?

[Corporation Watch]

Who Shredded Our Safety Net?

  By James Ridgeway

(Mother Jones, April 28) -- Like most people whose quality of life  
depends upon the fluctuations of an Individual Retirement Account  
(IRA), 401(k), 403(b), or other acronym-soup retirement account, I was  
born long before such things existed.

	It's easy to forget, now that more than half of us have been made  
shareholders, that until well past the middle of the 20th century,  
most people had nothing to do with the stock market: Wall Street was  
for the wealthy and the reckless.

	It was a world most Americans didn't understand and, after 1929,  
didn't trust. Some lucky people had pensions, but few had the  
privilege of even thinking about retirement. They were too busy trying  
to survive the present -- which meant the Great Depression and then  
World War II.

	I spent the war years in Washington, DC, where my father had a minor  
position in the Roosevelt administration. After school, my brother and  
I spent most of our time running around the streets, trying to get the  
air-raid wardens to give us a scrap of nylon parachute, or maybe even  
one of their cast-off World War I helmets, before the blackout drill  
began.

	One evening, my mother called us into the dining room and solemnly  
presented each of us with a $25 war bond. That was my first contact  
with the world of investment. Compared to a piece of parachute, it was  
a real downer.

	Sixty-five years later it's still a downer, as I contemplate my  
future at a time of deep recession with no pension and a depleted  
401(k). And it occurs to me that the very notion of a comfortable,  
paid retirement may turn out to have been a temporary phenomenon,  
whose life span was almost precisely the same as my own.

	The United States instituted military pensions after the Civil War,  
but German chancellor Otto von Bismarck is generally credited with  
creating the first national pension system, in the late 1880s, partly  
to combat the growing appeal of Marxism.

	Since Bismarck's pensions kicked in at 70, and the average life  
expectancy in Germany at the time was under 45, it wasn't much of an  
investment on the part of the state.

	In fact, until about World War II, a majority of people died before  
they reached what we now think of as retirement age; those who made it  
to 65 depended on savings or relatives, or went to the poorhouse.

	The truly pivotal moment in the history of paid retirement came in  
the year before my birth, 1935, with the passage of the Social  
Security Act (again, in part to ward off more radical proposals). It  
lifted millions of the elderly out of poverty, but would never, by  
itself, provide a comfortable living.

	That came with the rise of employer-funded pensions, which were  
fought for by unions in the early part of the century and expanded  
during World War II, when they became a way to reward workers during  
government-mandated wage freezes.

	Suddenly, retirement became a possibility for millions of American  
workers, through "defined benefit" plans that promised a steady  
monthly payment at retirement. Although a portion of the pension funds  
might be invested in the stock market, the pay-out to workers didn't  
depend on the market's fluctuations.

	After the war, my father joined IBM and remained there for about 15  
years. I remember that he was constantly in debt from paying our  
college tuitions and medical bills for his ailing parents.

	He never talked about it, but every so often I would see a line of  
bills from credit companies spread out on the bed. He had a fierce  
dislike of Wall Street and the banking industry, formed during the  
Depression and abetted now by his high-interest debts.

	Although he had a three-hour round-trip commute on the New York  
Central Railroad every day from our home in a then-unfashionable part  
of the Hudson Valley, he often remarked how grateful he was that he  
didn't have to ride the New Haven trains with all the cocktail- 
wielding brokers.

	Even if he'd had any money to spare, he wouldn't have invested it on  
Wall Street. But when he retired, he got his pension, which my mother  
continued to collect after he died -- not much, but enough to live on  
in a frugal way.

	I was plunged into the world of finance when I got my first job, at  
the Wall Street Journal, at the beginning of the 1960s. They put me to  
work writing up corporate bonds, especially initial public offerings,  
on the Dow Jones ticker.

	Every time there was a bond sale, I would call up the manager of the  
syndicate of investment banks selling the securities to find out what  
happened. He would invariably say, "Over subscribed, and the books  
closed," which would be duly noted along with the selling price on the  
ticker.

	The bonds were always quickly snapped up by institutional investors  
and others in the know. I had only the thinnest understanding of how  
any of this worked, but I dutifully wrote everything down, and no one  
seemed to complain.

	The first ordinary person I met who regularly invested in the stock  
market was a guy I'll call Frankie, who was in my National Guard unit.  
While working at the Journal, I was still satisfying my Guard service  
requirement with two-week summer stints as a truck and jeep driver,  
upstate at Camp Drum, along with periodic training sessions at the  
armory on Lexington Avenue.

	I use the term "training session" loosely: The Fighting 69th has a  
robust record of combat stretching back to the Civil War, but in those  
days, we spent a good deal of our time on roof of the armory smoking,  
drinking beer, and listening to Frankie recount his days driving rich  
people around at his job at the Jaguar showroom uptown.

	Frankie always had tips that he'd picked up from his well-to-do  
customers. The next morning we would rush out to a broker and put down  
$100 on some obscure stock that, according to Frankie's sources, was  
all set to skyrocket.

	I remember watching the newspapers as, right on schedule, one of our  
stocks began to rise -- from $7 a share to $8 to $8.50. We rubbed our  
hands together in expectation of the proceeds that would soon be  
raining down on us, delighted that we had tapped into the magic circle  
of rich people who got even richer by playing the stock market.

	Then our stock dropped overnight, to $2 a share. On the roof the  
following week, Frankie was sheepish and apologetic, but unperturbed.  
The market went up and the market went down, he shrugged. To make  
money you had to stick it out. He promised to get us a new and better  
tip from the Jaguar buyers.

	At the Journal, meanwhile, I was moved to the banking section, where  
I was assigned to cover mutual funds -- something I'd never heard of  
before coming to the paper.

	Instead of buying shares of this or that stock, a mutual fund would  
bundle up a number of investments: blue-chip companies, technology  
stocks, or low-priced securities that amounted to little more than  
fliers in high-risk markets.

	The mix within the fund, and its return, was the handiwork of  
supposedly astute advisers whose fortunes rose and fell depending on  
how their funds performed.

	Although the first modern mutual fund was founded in the 1920s, they  
were rare until the post-war period and still didn't account for much  
in the early 1960s. At the time I was given the mutual fund beat, it  
was scorned by the other, more upwardly mobile reporters.

	As John Bogle, legendary founder of the Vanguard Group of funds,  
reminded me in a recent interview, the prevailing attitude was that  
mutual funds were for people "too dumb to do anything else" -- those  
who didn't have the sophistication to deal in individual securities.

	But the old guard of Wall Street -- well-bred WASPs and German Jews  
who viewed the whole financial world as an insiders' club -- was being  
challenged by new firms coming into the over-the-counter market, many  
of them run by upstart kids from immigrant families.

	Some of these less hide-bound denizens of the Street saw mutual funds  
for what they were: an opportunity to take advantage of the post-war  
boom and bring a flood of new, middle-class investors into the market.

	I dutifully began going to mutual fund meetings, usually held at  
swank downtown men's clubs. There was always plenty of whiskey, high- 
class hors d'oeuvres, and sexy women handing out quarterly reports.  
Afterward, the business reporters would stagger back to our papers and  
write up a paragraph or two.

	Then, unexpectedly, I got a real story. An editor at the Journal had  
heard about a series of stockholder suits accusing some big mutual  
funds of ripping off consumers through a series of hidden fees, all  
appearing to come from different companies -- investment advisers,  
sales outfits, management concerns -- when in fact all were part of an  
interlocking network.

	Fees have always been one of the built-in scams of mutual funds,  
which charge investors for managing, operating, and even marketing and  
advertising the fund. The fees average up to 1.5 percent of the value  
of an account, but they can run as high as 3.5 percent a year.

	This means a fund with a 7 percent gross return has a net return to  
investors of only 3.5 percent, after taking into account the 3.5  
percent fee.

	As Rep. George Miller (D-Calif.), chairman of the House Committee on  
Education and Labor, put it during a February hearing on retirement  
security, "Wall Street middlemen live off the billions they generate  
from 401(k)s by imposing hidden and excessive fees that swallow up  
workers' money. Over a lifetime of work, these hidden fees can take an  
enormous bite out of workers' accounts."

	Congress, of course, has known about this scandal for years, and has  
periodically floated legislation to limit certain types of mutual fund  
fees, or at least demand full disclosure.

	Committees have held hearings, the Government Accountability Office  
has produced studies, and the Securities and Exchange Commission (SEC)  
has paid a good deal of lip service to the matter.

	But in the more than four decades since those first stockholder  
suits, through Republican and Democratic administrations alike, no  
meaningful changes have been made.

	Instead, the most significant challenge to the mutual fund fee rip- 
off has come from inside the industry, through John Bogle's invention  
of the index fund.

	Bogle's Vanguard funds gave the lie to the fee scam by replacing the  
vaunted genius of the mutual fund manager with a computer that  
constantly evaluates the value and trajectory of different funds --  
his average fees are 20 percent of the industry average.

	(In the same spirit, the Chicago Sun-Times has in recent years had a  
monkey picking stocks. The monkey's four-year streak of beating the  
market was broken in 2007 -- but he still managed to out-perform some  
major financial advisers.)

	The Journal eventually fired me, and I can't blame them: I didn't  
understand mutual funds, and I barely understood stocks, bonds, or  
banking -- save the ever-present dread of a bounced check.

	So I went to London, where I worked as a waiter in a mod coffee bar  
in North London to supplement my freelance work for the London  
Observer. But even there, I couldn't shake the mutual fund jinx.

	Right away I was dispatched to Edinburgh to cover the annual meeting  
of a new mutual fund company. The scene was just like the one in New  
York, except that the whiskey was older, the girls were younger, and  
the financial jargon was dished out by smiling Scotsmen whose accent I  
could barely decipher.

	Their message, as far as I could make out, was just like the New York  
executives', too: Mutual funds were just brilliant because they pooled  
resources and spread out risk, allowing ordinary people to partake in  
the bounty of the market.

	On both sides of the Atlantic, mutual funds at this point were  
promoted as a way to democratize investment. Never mind that what made  
the funds accessible to the common man and woman -- the fact that they  
mixed together an ever-changing stew of financial instruments, and  
then ladled it out in affordable portions -- also made them  
inscrutable to most investors (and most elected officials as well).

	No one seemed to know what might be buried in those funds -- and no  
one seemed to care. It was the perfect manifestation of J. Paul  
Getty's adage: "Money is like manure. You have to spread it around or  
it smells." And mutual funds were about to start really shoveling it  
-- courtesy of the U.S. government.

	In 1980, a Philadelphia benefits consultant named Ted Benna  
discovered an obscure codicil in the tax code known as Section 401(k),  
under which employees would not be taxed on income they chose to  
receive as "deferred" compensation -- money they didn't use until later.

	The provision had been passed, without any hearings or public debate,  
just two years earlier as a favor to bank holding companies -- but  
Benna realized that the wording of the law was not limited to banks.

	Any company could create a savings account in which employees could  
sock away a little pre-tax money every paycheck, including (but not  
requiring) contributions by the employer.

	Some of the early supporters of the 401(k) hoped both to spur  
personal retirement savings and encourage companies without any  
pension plans to start them up.

	So-called "defined contribution" accounts were also seen as more  
useful for workers who didn't stay in one job long enough to  
accumulate a significant pension benefit.

	Others no doubt recognized them for what they were: a huge boon to  
corporate America, which quickly moved to replace costly defined- 
benefit plans with 401(k)s invested in mutual funds.

	Unions were pressured to acquiesce to cuts in benefits, and workers  
were sold the idea that 401(k)s offered more "choice" and the chance  
of high returns in the market.

	For employers it was heaven: The more stocks prospered, the more they  
could cut back their own contributions to retirement plans as well as  
the premiums they paid to the federal Pension Benefit Guaranty  
Corporation (PBGC).

	Better yet, they could make their contributions in shares of their  
own stock, and channel employee contributions that way as well -- a  
practice that helped Enron, among others, inflate its stock value and  
left employees high and dry when it collapsed.

	It soon became clear that 401(k)s did not simply supplement pensions,  
but replaced them. Congress did its part by raising the premiums for  
defined-benefit plans -- which required employers to contribute to the  
PBGC -- thereby making 401(k)s (which did not) more attractive.

	As time went on, more and more companies froze their defined-benefit  
plans, creating a two-tiered system whereby long-time workers got to  
keep their traditional pensions, while new employees were routed into  
401(k) plans.

	In addition to their advantages for employers, 401(k)s favored  
wealthier workers in higher tax brackets, who stood to benefit more  
from being able to set aside a portion of their salaries tax free.

	No one seemed bothered by the move of a vast portion of Americans'  
retirement funds into risky securities-based funds. The Federal  
Reserve supported the 401(k) boom -- just as it later would the  
housing boom -- by championing deregulation and keeping interest rates  
low.

	Why would any one choose to invest their retirement funds in safe  
(but low-interest) bonds or T-bills when they could make 10, 15, or  
even 20 percent in the stock market?

	In 1983, according to a survey conducted by two securities-industry  
groups, just 15.9 percent of American households owned equities; by  
2005, the figure was 56.9 percent. More than half of the households  
that owned stocks first got them through a 401(k) or similar account.

	I personally took part in the 401(k) revolution, though not by  
choice. Through the 1960s and '70s, I worked at The New Republic and a  
couple of small publications I co-founded.

	By this time I understood a little more about how finance capitalism  
worked (having read the footnotes to Marx's 'Capital'). but since I  
also had a house and a son and no money to spare, I never faced any  
moral dilemmas over whether or not to invest for the future via the  
corrupt free market.

	By the 1980s, I had landed at the Village Voice, and when the staff  
formed a union, one of its demands was a pension plan. By then the  
defined-benefit plans were out of style, and the best we could get was  
a 401(k) with a small employer contribution.

	Like most 401(k) plans, this one was managed by a major financial  
company, which offered several choices for where we could put our money.

	For the staid old farts, there was the basic fixed-interest-bearing  
account, eschewed by the knowledgeable high-rollers who bet a quarter  
of their money in growth stocks and a quarter in balanced income, took  
a flier on small capital start-up companies, and even put a bit of  
money into some European pharmaceutical company or Asian sweatshop.

	To me, it all seemed like hedging your bets at the racetrack: Instead  
of putting money on a single horse, you put it on several, and hoped  
they would end up at the head of the pack.

	At some point, the irritable lady who changed the mix of funds in our  
401(k) over the phone gave way to an online system. Now everyone could  
be his own broker -- Las Vegas in your living room.

	You heard stories of steelworkers turning up on million-dollar yachts  
in the Caribbean after their plants closed -- thanks to their 401(k)  
winnings.

	Folk heroes rose out of the mutual-fund business: brash young  
investment advisers who won huge returns, geniuses who ran hedge  
funds, touting one stock or another.

	I watched my 401(k) earnings grow, and at some point, I actually  
began to think that if I were forced out of the journalism business at  
65, I might be able to live on the proceeds.

	I was far from alone. In 1983, 62 percent of workers relied on a  
defined-benefit plan for their retirement; by 2007, only 17 percent  
did, and 63 percent had only a 401(k) or similar defined-contribution  
plan. Meanwhile, assets in 401(k)s jumped from $92 billion in 1984 to  
$3 trillion.

	In fact, the rise of mutual funds, combined with the '90s boom and  
America's demographic realities, helped drive the current financial  
crisis. Though common sense would indicate that there was bound to be  
a crash -- simply because there aren't that many genuinely secure,  
high-quality investments with the kinds of yields people had grown  
accustomed to in the 1990s -- the global economy bought it nonetheless.

	"Because, you see," writes MSNBC financial analyst Jim Jubak, "it's  
the only way out for an aging world that's running a huge shortage of  
the real stuff. So investors were all too willing to buy fake  
investment-grade [securities] -- at prices commanded by the real  
investment-grade stuff -- until the con was finally revealed."

	Even the mutual fund scandal of 2003 -- prompted by then-New York  
attorney general Eliot Spitzer's discovery that a number of major  
funds and investment houses had colluded in buying and selling shares  
after the close of daily trading, at a high cost to the small-time,  
long-term investors who had money in 401(k)s -- didn't do much to  
dampen enthusiasm for the industry.

	Congress considered some legislation that it never passed, the SEC  
did a bit of impotent saber rattling, Spitzer was defanged by a sex  
scandal, and investments in mutual funds continued to grow.

	Then the crack-up began -- starting with the speculative instruments  
so often bundled together in mutual funds and passed off as secure  
places for Americans' nest eggs.

	That very "bundling," which was supposed to render the funds safer  
than individual securities by spreading out risk, actually made it  
easier to bury bad investments amid the good ones.

	Many of these funds turned out to be like the stacks of $20 bills  
proffered by counterfeiters -- with genuine bills showing on the  
outside and the fake stuff sandwiched in between.

	Sometime after I was fired from the Village Voice in the wake of its  
2005 takeover by the New Times chain, a cheery young man called from  
the 401(k) company. He introduced himself as Joe and offered to guide  
me into switching my funds to an IRA.

	Having been impressed by my interviews with John Bogle, I told him I  
was thinking of moving my money to Vanguard. He demurred, saying he  
would personally provide me with all the help I needed, offering me  
private phone numbers and so on.

	I felt like Joe wanted to be friends. He explained how my money was  
to be invested, much of it in fixed-rate instruments, and I agreed.

	Time passed, the market took a downturn, and I noticed on one of my  
monthly statements that the fixed-rate investments had disappeared,  
replaced by what looked like a money market account.

	I called the company and asked for my old friend Joe. Joe wasn't  
available, I was told, but another adviser would help me. A man got on  
the phone and explained that my instruments had "matured."

	I said that I was nervous and wanted to get into something really  
safe, even if at a lower rate. The man quickly assured me that the  
market was fine, just going through one of its temporary corrections.

	But every investor was different, he said, and he was anxious to find  
my "comfort level." I said that to be on the safe side, since I'd  
recently turned 70, I would like to invest in U.S. Treasury bills,  
perhaps of an intermediate term.

	He was silent for a moment, then finally said, "Let me get a real  
expert on the phone. You'll be speaking to Robert. He's a veteran of  
the market and knows bonds in and out."

	There was a pause, and Robert got on the phone. I told him I was  
thinking about Treasuries, and he let out a bellow of laughter. "Good  
god, no," said Robert. "That would be terrible. Nobody -- nobody  
should put money into Treasuries."

	"But..."

	"NO. That would be foolhardy. I have been in this a long time,"  
Robert said. "The market goes up. The market goes down. Don't worry  
about it."

	He sounded a lot like Frankie had 45 years earlier on the armory  
roof. Robert assured me that everything would be all right. In fact,  
he said, this would be a good time to take advantage of the downturn  
and buy more stocks while they were cheap.

	I said goodbye, not wanting to upset Robert further. He sounded like  
he might be about to have a stroke. I later learned that Treasuries  
have a far smaller sales margin than stocks and bonds.

	I finally did move my money to another mutual fund company. Following  
its advice, I put it in a bundle of indexed funds that were supposed  
to be good for old people who might need to start using the money soon.

	These so-called target-date funds had relatively low proportions of  
stocks. Not low enough, as it turned out. In 2008, the average value  
of stock mutual funds dropped 38 percent; bond funds dropped 8 percent.

	Among 401(k) holders, older people who had worked and contributed for  
20 years or more, and amassed substantial savings, fared the worst,  
losing an average of about 25 percent of value, even after counting  
the money they added through the years.

	(On top of that, many companies -- including Mother Jones -- have  
suspended employer matching for retirement accounts as a result of the  
economic crisis.)

	As for the supposedly safe target-date funds -- those designed for  
investors planning to retire in 2010, less than a year from now --  
they lost 22 percent. That's about what my losses have come to.

	If I'd moved into Treasuries, as my instincts dictated, I wouldn't  
have earned much, but my principal would have been protected.

	So what happens next? George Soros, the genius commodities man, says  
there is no bottom in sight for the market. Nouriel Roubini, (a.k.a.  
"Dr. Doom") the New York University professor who has been predicting  
disaster for years, says the American capitalist financial system has  
collapsed and cannot be revived.

	Vanguard's John Bogle, who predicted the recession two years ago,  
sees the market continuing to sink before recovery begins. "This is  
the most difficult set of market conditions I have seen," he told me.

	Stocks may recover over the next decade, but by then I may be dead.  
What do I do? "If you can't afford to lose another red cent," Bogle  
told me when I interviewed him again at the end of January, "you must  
get out of the stock market."

	But to go where? It's too late for me -- but clearly the time has  
come to reform the system that got us to this point.

	One substantive idea comes from Teresa Ghilarducci, professor of  
economics at the New School in New York City, who was asked to draw up  
a pension-reform proposal for the Economic Policy Institute. She  
proposed a mixture of "a strong defined-benefit pension system and a  
strong Social Security system."

	To this it adds what it calls "Guaranteed Retirement Accounts," under  
which workers who don't have access to a defined-benefit plan would be  
required to put 2.5 percent of their income (matched with another 2.5  
percent from their employers) into investment funds run by Social  
Security and earning a rate of return guaranteed by the federal  
government.

	Modest though it may be, Prof. Ghilarducci's proposal sadly  
represents the outer edge of a political debate that is more likely to  
end up with yet another wishy-washy compromise.

	As part of its new budget, for example, the Obama administration in  
February laid out plans for what it calls "a system of automatic  
workplace pensions, to operate alongside Social Security, that is  
expected to dramatically increase" retirement and personal savings.

	The term "pension" in this case is grossly misleading: The plan does  
little more than require employers that don't offer retirement plans  
already to enroll employees in a "direct-deposit IRA account" unless  
they opt out.

	This pretty much amounts to 401(k)s for all, with the difference  
being perhaps some improvement in regulation.

	Likewise, Congress, never one to throw up obstacles to the  
advancement of the mutual-fund industry, is considering changes to the  
401(k) structure to head off a rising chorus of screams from angry  
geezers, who make up a growing sector of the electorate.

	These proposals include a tepid re-make of the 401(k), adding on  
portability, and preventing companies from using the plan assets to  
prop up their own stocks and bonds.

	"There are all sorts of reforms that could be helpful -- but only at  
the margins," notes Karen Ferguson, director of the Pension Rights  
Center and a leader in a new coalition called Retirement USA, who has  
long argued for a change in the nation's retirement structure.

	These reforms range from disclosure of fees and better conflict-of- 
interest rules on investment advice to adding a fund that only invests  
in government securities.

	But, Ferguson notes, none of these changes would "produce either  
adequate or secure incomes." And unlike the Economic Policy  
Institute's plan, all of these approaches preserve the power and  
profits of Wall Street investment banks.

	Some economists find this all needlessly complicated. University of  
Texas economist James K. Galbraith  wants to see a simple but decisive  
change: Increase Social Security benefits to the point that people can  
live off them, and leave the 401(k)s to swing in the wind.

	Conservatives, on the other hand, want to cut Social Security and  
other old-age entitlements to prevent the mythical collapse of a  
supposedly insolvent system.

	(In fact, as Dean Baker of the Center for Economic and Policy  
Research has pointed out, Social Security has proved far more solvent  
and sound than anything Wall Street has produced.)

	In any case, with banks hanging by a thread, Wall Street hemorrhaging  
bail-out funds, a growing mass of unemployed workers, and a continuing  
decline of economic activity, retirement concerns will likely end up  
last in line.

	What will older folks do? I can only speak for myself. After getting  
myself out of the stock market and doing my best to cut expenses (and  
lower my standard of living), I'm working on accepting the fact that  
the idea of retirement is over.

	And I have to wonder if someday the tale of a foolish generation of  
Americans, who imagined that a lifetime of work would be rewarded with  
a comfortable and secure old age, will become just another footnote in  
the annals of the market.