Plummeting Stock Market Leaves N.H. Residents With Poor Retirement Plans
401K’s
New Hampshire Union Leader
Aoife Connors
Boston University Washington News Service
March. 3, 2009
WASHINGTON – Plunging stock markets, down to the lowest level in 12 years, has caused a severe decline in the value of 401(k) retirement plans. “It feels more like a 101(k) at the moment,” Rep. Paul Hodes (D- N.H.) said Tuesday, lamenting that the value of his pension plan has been wiped out.
“I am in the same boat as many folks in New Hampshire,” he said.
Hodes said he truly appreciates the pain caused by the devaluation of 401(k)’s. “Many of my friends and people in New Hampshire are worried.”
Peter Orszag, director of the Congressional Budget Office, said Americans have lost about $2 trillion worth of retirement savings in 401(k)s and traditional defined-benefit pension plans.
A 401(k) plan allows workers to increase the value of their retirement savings by investing a portion of their income before tax in stocks, bonds and money-market investments while deferring income taxes on the money until withdrawal. In many cases, employers match part of that investment.
The 401(k), a so-called defined-contribution plan to which employers and employees contribute, is the least secure retirement plan because it is exposed to the volatility and value of the stock market, unlike Social Security or defined-benefit pension plans, which guarantee retirees a fixed monthly sum during retirement.
Because of the financial crisis, some companies say they can no longer take any responsibility for their employee’s futures. Many, including Macy’s and United Parcel Service, have suspended their matching contributions to 401(k)s. Others have dropped the traditional plans or scaled back the benefits.
People’s pensions have certainly not been completely wiped out, Rep Carol Shea-Porter (D-N.H.) said. “They are dramatically reduced and an extra burden, but if people keep their 401(k) pension money invested, when the economy pops up they will make money again.” It is the people retiring now who are most affected, she said.
Bruce Elmslie, professor of economics at the University of New Hampshire, agreed, saying that “if you want to build your savings to make money for you, you’ve got to invest in the stock market.”
He added, “it takes time to make money when investing in stocks.”
Elmslie advised that “if people have retirement investments in the stock market they should be left there; they have lost as much as they can lose by now.”
The stock market was overvalued in the same way that Americans overvalued debt and the housing market, Hodes said. “The subprime housing bubble of 30 years has burst and resulted in a huge stock market contraction.”
Hodes said the stock market is not yet reacting to the fundamentals of the recovery plan Congress approved last month, but the recovery is happening. “Stimulus will start kicking in this spring — the Fed programs, TARP (The Troubled Asset Relief Program) and the recovery package are all efforts being made to restore the financial system.” He added that it will take some time, as President Obama has indicated.
Shea-Porter said, “I have heard and read a lot of the predictions and spoken to the economists in the Capitol. They say that 2009 will be very bad but we will see a turnaround in 2010 and 2011.”
“The fall in the stock market,” she added, “has a lot to do with people’s fear of the economy, the housing market and inventories. We must focus on the economy and getting banks creating credit.”
Elmslie said he had seen estimates that the earliest the economy will start to come out of the recession is June and the latest a year from now. “I think the bottom can’t be too far away now,” Elmslie said. “I would predict within six months.”
The stock market will not take as long to bottom out, he said. “We will not see a rapid rise that’s sustainable; it will rise and fall and stay at a certain level for a while, that will be the first sign that we are on the way back up.”
He said stock market advances usually precede improvements in unemployment rates by many months.
Shea-Porter said that as Congress makes changes in regulatory and financial systems, “we should look at what changes are necessary in 401(k)’s, Social Security and pensions.”
As the population ages; the burden on Social Security increases. Many have called for reform or even privatization of the system. But Hodes warned that “the risks of exposing one’s retirement to the whims of a market are not rational.”
The system is in need of reform because it is putting an increasing burden on the national debt and increasing the deficit, Elmslie said. “New Hampshire residents can expect to see decreasing benefits, one way or another.”
People will stay in the labor market longer and retire at age 66 instead of 62, in order to increase their Social Security benefit, Elmslie added. This will save the system money because there will be fewer people on the system’s rolls and for a shorter period of time.
Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School of Social Research in New York city and author of a book about the effect of pension losses on older Americans, said Social Security has been a dependable mainstay through boom and bust cycles because it has not been privatized.
“We need to make sure that our federal government is acting prudently and not spending the Social Security surplus for other needs,” she said.
Elmslie said that the main effect of the current stock market decline on the economy is that people are holding off on retirement, the values of homes have dried up and 401(k)s have shriveled.
Shea-Porter said that “a lot of people are so upset they’re not even looking at their portfolios because they have been hit so hard.”
“People have lost so much of their 401(k) savings” Hodes said, “so prudence and a reasonably conservative approach are required from the mainstream.”
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