I can hear it now. "No one told me that if I withdraw money from my 401(k) I would not have it when I retire"! Sadly, this is the next big area where we will find ourselves in trouble in the next few years.
With the ATM closed - you know, the "equity" in people's home which was being used for such critical items as trips to Aruba, second homes, Lexus' in the driveway, etc. - people are wondering where they will get the money for the essentials in life (Cable TV, luxury cars, trips..). Ah, then they find it. Their quarterly 401(K) statement comes in and shows a few hundred thousand dollars "in the bank".
Even with a 10% tax penalty, people will still raid their retirement savings according to an article by James Shaft entitled: Holiday Spending Raises Recession Flag. This article cites that spending is down for Christmas and a lot of that has to do with the fact that the American public has hit the end of the ponzi scheme of taking on more debt every year. He states:
"People don't realize how far expenditure is above income. Each year the consumer needs to increase its debts by the equivalent of 4 percent of GDP just to keep that level of that expenditure (consumption plus investment) the same," said Albert Edwards, global strategist at Societe Generale Cross Asset Research.
"With the current imbalance between spending and income, debt carries on ballooning upward just to keep expenditures the same. If the rate of borrowing falls back a bit, expenditure falls back very sharply."
Now, the crux of the matter. Where do I get all that money I need? The equity in our homes has shrunk fast. Again, Shaft states:
"What is key now is that the main asset against which Americans borrow has declined in value at the same time that borrowing has become much more difficult.
The S&P/Case-Shiller national index is down 4.5 percent for the year to November, and many analysts are predicting bigger falls in the coming year. American's equity in their own houses declined by $128 billion in the third quarter, according to Federal Reserve data.
And banks are less willing lend against that dwindling equity. Home equity lines of credit and other mortgage loans are now harder to get and more expensive, due in part to a higher level or perceived risk by banks but also because of the effective shutdown of the global securitized debt markets."
This brings the average American to their retirement account. A survey from CFO magazine and Duke University found:
"...that nearly a fifth of CFOs have seen an increase in those seeking "hardship" access to their retirement accounts, with 45 percent of those using the money to make mortgage payments.
Incredibly, 40 percent sought to break their retirement piggybank to allow "non-emergency" spending.
Given that these withdrawals incur a ten percent penalty tax it's not "something people do lightly," said John Graham, a finance professor at Duke."
The Chicago Tribune wrote about this in October in an article called: "Cash Strapped Americans Raiding Their 401(K)s". a
This situation between consumer spending, home price implosion and now the raiding of the retirement accounts reminds me of what I read about during the wild fires in San Diego earlier this year. Every time you think you have one out, another starts up across town. The "wild fire" of the home equity issue seems to have been brought under control (we think) but now we have this "ember" which floated across town and is about to start another wildfire. And like those fires, it seems every one gets worse. It is one thing to lose your home, worst case you may have to move into a smaller home or small apartment. Hell, that is where I started so I am sure I can do that.
But, what will we do when people show up at retirement's doorstep and find they have no retirement money? What will the Government do then?
And this brings me to my final point; the one I have been making all along which is that of moral hazard. People will take crazy risks if they think they will be bailed out. And what is the lesson of the mortgage problem?
Simple... Americans in the aggregate are saying, "Surely if the Government bailed out those who were in over their heads on a home there definitely will be "some program" when we all show up at the Social Security office with no retirement pension or savings". And thus, moral hazard begets more and more risk.
Now, what to do? The US Government should IMMEDIATELY pass laws deeply restricting the borrowing or withdrawing of money from the 401(K)/IRA. Rather than a 10% tax , there should be something like a 50% tax and that money put into a special fund (part of social security) because you know the Government will need it when they "bail out" retirement fund borrowers in the future.
Let's hope our Government, for once, actually looks forward and sees a problem coming and takes action to prevent it rather than letting it explode in their face. Nah.. just a dream!