Preface to the Paperback Edition
AS I WRITE THE PREFACE TO THIS EDITION, the cover of Time magazine asks, “Will you ever be able to retire?” The Wall Street Journal prints the front-page headline “For Investors Near Retirement, Stock Fall Poses Stark Choices.” USA Today, The New York Times, The Washington Post, The Boston Globe, and other papers have told about baby boomers whose retirement plans have crashed and of retirees who must go back to work. Enron, Global Crossing, WorldCom, fraud and padded numbers, options, layoffs, conflicts of interest among auditors and stock analysts, and legislation to prevent all this from happening again are front-page news.
The global investment adviser Wilshire Associates reports that stock portfolios lost $8.2 trillion after their March 2000 peak. But was that money ever real? In a rational world, how could a company like Enron, said to be the seventh largest of the Fortune 500 companies, go bankrupt in less than a year after it was supposedly worth $62 billion? And how could 98 percent of WorldCom’s capitalized value of $41.7 billion vanish in six months?
This book tells why that money, which was based on stock prices, was just phantom wealth and why the waste and abuses it caused would show up after it vanished. The book also explains why boomers can only build real security by ignoring phantom wealth, making realistic plans, and living in vibrant, healthy communities.
Some think that today’s stock market problems are due to a “few bad apples” or are like a “hangover” after a “binge.” But as the book explains, the picture is much bigger. We are seeing just a preview of what can happen if enough Americans don’t learn why they should plan to work and support themselves for more years than previous generations have done. This book explains XVI how boomers’ retirement plans have helped inflate stock prices and how they could depress them even more. That would hurt everybody.
Financial experts and political leaders are missing the most important lessons. They say, for example, that workers who suffered the largest 401(k) plan losses owned too much of their companies’ stock and the problem can be fixed with more diversification. But that that ignores the mistake of depending too much on any stocks to pay retirement incomes. For two decades, the problems caused by retirement plans were overlooked, until portfolio balances plunged.
After 401(k) plans were started in 1982, record amounts flowed into pension and mutual funds, whose managers were expected to make the money grow. They pressed companies for higher stock prices, and this led to years of cost cutting, downsizing, merging, promoting globalization, laying off domestic employees, reducing support for communities, exploiting the environment, and buying back stocks. Most people still do not understand how much of the pressure for higher stock prices—and rewards for executives who produced them—came from outside of most companies. Much of it started with retirement plans.
And retirement plans can end it all with a bang. As this book explains, now that few stocks pay significant dividends, they are just things to buy and hope to sell at a profit. But no one has explained who will be able to pay enough for the stocks that the boomers’ pension and retirement accounts will have to sell to produce retirement income. These accounts hold half of the country’s traded stocks, and the most likely buyers are members of the younger, relatively smaller Generation X. Few boomers realize how much they will be depending on younger workers for their retirement income. The United States is literally betting its future on a concept that has never been explained.
AARP publications, Consumer Reports, and others are starting to tell their readers to plan to work longer. That is a switch, and it is good advice. Some brokers and financial advisers are now giving similar advice to their clients. I hope that enough boomers will understand and act in time to reduce the risks of expecting too much from stocks without triggering massive sales that could lead to a disaster. The trick will be to prevent the boomers’ boom from becoming the boomers’ bust, and we won’t have much chance of pulling it off if we don’t understand it.
Many boomers will need appropriate and fulfilling jobs for their later years. They will also need strong communities that provide services that they will not be able to provide for themselves. Yet, today, pension and mutual fund managers encourage companies to cut these jobs and the costs of supporting communities in order to increase stock prices. But lean and mean is just backwards. It pits workers against retirees and boomers’ hopes for their later years against their own present and future needs.
The mindset that made inflating stocks the primary goal of public corporations has led to failure. For several decades, companies concentrated on what Wall Street wants and ignored what Main Street needs. That formula was wrong and its failure is behind many of today’s headlines.
Large companies are like states and countries in their size and the range of interests they serve. They must have balanced goals. One goal should be to help their employees, who are stockholders, to enjoy their later years while working to contribute to their own support for as long as they can. Companies and institutional investors are the most powerful economic forces in the country. If they help make this transition, they will be part of the solution. If not, they will continue to be part of the problem.
The book explains how the stock bubble, the “new economy,” globalization, corporate scandals, and the drive for growth by pension and mutual funds are all related to America’s flawed retirement system. By looking at the whole system, it is easy to see how it can fail and could lead to a depression. That doesn’t have to happen, but the longer the whole picture is ignored or denied, the more likely it becomes.
Why This Book Was Written
The book is intended to be a balanced, responsible warning about a serious problem that few people yet see, even today. It was written primarily for ten groups of readers, many of whom may be in more than one group:
Baby boomers and others who are buying stocks directly and indirectly through pension and mutual funds to help pay their retirement incomes
Younger workers
Parents of baby boomers
Wealthy people who are arranging their estates
Visionary leaders who are working to reduce the contemporary emphasis on materialism and find a better balance of values and goals
Financial professionals who sell or manage pension and mutual funds, advise individuals and organizations about retirement investments, or evaluate the financial condition of organizations and retirement accounts
Corporate directors, executives, and managers
Government officials of federal, state, and local governments who are concerned about the future financial condition and retirement plans of their jurisdictions
Professors of economics, government, and business administration
Heads of philanthropic foundations who have unique opportunities to help the country as they advance their own programs
How It Is Organized
The Introduction gives a brief overview of the book. It lists the book’s five main messages and explains that they apply to individuals, retirement plans, and the economy as a whole. It also lists the twenty-six Highlights, or key points of the book.
The book is divided into three parts. Part I, which includes Chapters 1 through 4, concentrates on baby boomers and their retirement plans.
Chapter 1 begins with a discussion of Social Security because most people know that the program has a problem. But many people don’t understand the problem and very few realize that it is just the tip of the retirement iceberg. The chapter explains the problem and why past proposals to use stocks to solve it are unlikely to work.
Chapter 2 goes on to explain why all retirement plans that expect to sell assets or take money from younger workers to pay retirement incomes have the same basic problem as Social Security does. The chapter explains why stocks probably can’t help millions of boomers to retire and what could happen if the country fails to recognize that in time.
Chapter 3 briefly summarizes eight other books that differ with or support the positions taken in Chapters 1 and 2. It explains why all of these authors’ opinions can’t possibly turn out to be right because they conflict among themselves.
Chapter 4 discusses what may happen to individual baby boomers as they age. It classifies the boomers into seven types to show the magnitude of the national problem that relatively few people see and to help individual baby boomers reading this book to think through their own situations.
Part II, which includes Chapters 5 through 8, concentrates on how stocks are used to create phantom wealth. It introduces explanations and simple analysis techniques that are not normally used by economists or financial professionals.
Chapter 5 sets the stage by examining two different investment approaches and describing five classes of companies that are used for the analyses that follow. Chapters 6 through 8 explain some of the positive and negative effects of stocks, how stock prices are set, and problems that are caused by the drive to increase stock prices.
The current processes for creating and using phantom wealth are unstable and destructive in many ways. Even without the retirement plan issue, sooner or later they will have to be modified. But the fact that retirement plans have been built on the processes makes the need to change them more urgent. Retirement savings have flowed into these plans and they drove stock prices to record heights, but that was just the first half of the cycle. When the plans will need to sell stocks to pay retirement incomes, they may cause an equally historic market reversal.
Part III, which includes Chapters 9 through 12, identifies future needs and how to meet them. It suggests different ways of thinking in order to help people escape today’s mindset, which fosters the phantom wealth economy. The suggestions are made to trigger readers’ creative thought and exploration. They are not intended to be recipes or how-to lists.
Chapter 9 is the watershed chapter. In it, the discussion shifts from problems to opportunities. It explains how we in this country can use the knowledge of what may happen if current practices are not changed to redirect the power of investing to help meet the needs of all people, including the growing number of seniors.
Chapters 10 and 11 discuss what individuals and organizations can do to help themselves and create a more sustainable society and economy.
And finally, Chapter 12 provides a broad view of how to change the investment system from producing phantom wealth to meeting real needs.
“We”
In general, I use “we” when I’m speaking of the author and the reader. “I” shows up from time to time when it seems appropriate, but in the main, the book is intended to explore issues informally and collegially. I hope it will encourage and help readers to think about the future without being dull or preachy.
Thornton Parker
August 2002
Washington, DC