401k graffiti


Recently I wrote about the research of University of Chicago professor Amir Sufi on the "balance sheet" recession and its downward effect on employment—basically, people got in over their ears in debt, stopped spending, and businesses pulled back in kind. Along those lines, some more bad news from Chicago Fed chair Charles Evans:

American households "have been spending recently in a way that did not seem in line with income growth. So somehow they've been doing that through perhaps additional credit card usage," Chicago Federal Reserve President Charles Evans said on Friday.

"If they saw future income and employment increasing strongly then that would be reasonable. But I don't see that. So I've been puzzled by this," he said.

So Americans are spending a bit more, but that money is coming out of debt, not savings—part of what got us in trouble in the first place. That Reuters article finds some chilling evidence of where that money is coming from, courtesy of soon-to-be-even-more-quasi-local firm Aon Hewitt (emphasis mine):

Almost a third of plan participants currently have a loan outstanding, according to an upcoming survey of 150,000 holders of 401(k)s by consulting firm Aon Hewitt.


Loans taken from retirement savings accounts jumped 20 percent last year across all demographics, according to a survey to be published in March. Among lower earners they leapt by as much as 60 percent, said Aon Hewitt's Hess. The vast majority of borrowers, she said, need the money for essential expenses like bills, car repairs and college tuition.

This is particularly disturbing given another trend: the aging of the American workplace, which is likely driven primarily by retirement fears:

The reasons for the surge of older workers are complex, experts said, but one of the primary economic forces behind it is the growing fear among older Americans that they lack the means to support their retirement needs.

The phenomenon is closely linked to the broad shift in the United States that began in the ’80s away from reliance on company pensions toward the adoption of 401(k) plans and other personal savings.

One of the reasons for the expansion of the housing bubble was the use of houses as both a credit line and as a retirement-fund substitute: an asset that could be sold in the future at a profit as a necessary source of income in one's golden years. If retirement funds themselves replace houses as a source of credit to the degree housing stock served during the housing bubble, that could be a very scary bubble with implications far down the line for a graying country. And while you're technically borrowing from yourself, making it more affordable debt in some circumstances, 401(k) loans are particularly risky in an unstable job market.

Amidst all this improvement of the American economy still seems to be increasingly accepted as a fait accompli. Even Mitt Romney, who of all people would have an interest in describing the glass as half empty, is hedging his bets:

For those keeping track, Romney said twice in three sentences that he believes the economy is “getting better.”

I’ve noticed over the last week, this keeps coming up. Shortly before the New Hampshire primary, Romney said he’s “glad” the economy is improving, but quickly added that President Obama “doesn’t deserve” credit. In an interview with Bloomberg Television, Romney also said the economy is recovering, but said “this president has not helped it.”

As Steve Benen points out, it's not exactly a winning argument. But perhaps Mitt should be patient, which brings us back around to Evans, who gave an appropriately ominous speech on Friday the 13th:

Though an improvement, this 2012 pace is not far above most analysts’ views of the potential rate of output growth for the economy. Thus, such growth rates are not strong enough to make much of a dent in the unemployment rate and other measures of resource slack. Indeed, the FOMC’s latest forecasts are for the unemployment rate to remain above 8-1/2 percent through 2012 and to fall only to about 8 percent in 2013.

Going into the presidential election, Atlanta Fed chief identifies a metric to watch out for:

However, the apparent stronger consumption at year-end was associated with falling savings rates, compensating for stagnating income growth. I question whether this consumer spending momentum will be sustained without a pickup in income growth.

It's still a wary time—more so, if the trends Aon noted continue, and the next bubble becomes our own savings.


Photograph: urban data (CC by 2.0)