Certain Lessons Are Hard to Learn

Today’s Wall Street Journal has a story about retirees of General Electric who have lost a sizable chunk of their retirement savings. Over the past 12 months GE has lost $140 billion in market value. It was a blue chip stock that most people thought was safe. They were wrong.

It’s happened before — major losses incurred by employees and retirees stemming from their decision to hold all or most of their personal savings in their company’s stock. Enron, Valiant, GM, Lehman, and Bear Stearns were mentioned in the WSJ article. But the list is much longer than that.

On the one hand, it’s easy to see how it happens. Confidence in one’s company builds up over a career. Loyalty. You become part of the family. It’s hard to be objective about the risks you’re taking. Why sell the stock that has treated you so well over the years?

On the other hand, there is the matter of history. And history tells us why we should sell. It highlights the risks of concentrated stock portfolios. And the benefits of diversification. Yet history is often ignored.

And so it’s happened again. As a result, some retirees with depleted retirement savings are returning to the workforce. Lives are being turned upside down.

You hate to see it happen. But it’s not that the risks were kept secret. To the contrary, they were in plain sight.

It makes me wonder what risks I might be taking that are in plain sight. What lessons from history am I ignoring?

There’s probably something.

The Boomers’ Last Hurrah

About 10,000 Baby Boomers (those born between 1945 and 1964) retire each and every day in the United States. And now a large number are reaching age 70 each and every day. Our last hurrah is about to unfold.

The aging of my generation will produce a couple of indisputable consequences. First, outside of health care, the massive wave of retirements will depress consumption — that is, spending — in a very significant way, which will limit growth and exert deflationary pressures.

Second, this retirement wave will exacerbate our pension mess by increasing pension and Social Security costs dramatically. This comes against a backdrop of underfunded plans.

Despite what the right-wing propaganda machine persistently spews forth, Social Security is a relatively easy fix. But the state and private pension fix isn’t.

State and corporate pension plans are grossly underfunded. Some have already failed. More failures are to come. In short, some will renege on their obligations and retirees will not be receiving the monthly checks they’re expecting. (The only “bright”spot for the pension plans is that Americans are now dying earlier, thereby reducing the plans’ payouts.)

Saving some of the public systems will require tax increases, which will further suppress consumption.

Third, equity prices and, therefore, investment portfolios, will take a hit. Take General Electric for example. GE’s underfunded pension hole is $31 billion. Yet the market has yet to fully price into the stock this huge deficit.

Many other companies have large unfunded pension commitments. This will not be good for asset values and, by extension, individuals’ and endowments’ portfolios. Less spending. Deflationary pressures.

There are 72 million Boomers in the U.S. My generation had a major impact on our economy and society as we moved through adulthood. Don’t expect the impact to be any less as we move through retirement. It’s just that the impact will be very, very different.