History of Retirement: Why We Invest in Stocks
Have you ever wondered how the elderly supported themselves hundreds of years ago?
In China’s Han Dynasty, for example, the elderly used pawn shops to survive.
In Ancient Greece, young people stockpiled olive oil to sell for income once they grew old.
Over in Europe, people formed guilds. They would pay dues to the club while they were young, and then the club would financially support them when they were old.
In the United States, early settlers were farmers that lived off the land. When they got too old to work on the farm, their families would take it over and provide for them.
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The History of Retirement
These self-sufficient methods for survival fell out of favor during the Industrial Revolution.
People were giving up farm life in exchange for the city.
If you sold your farm and moved to the city for work — how were you supposed to feed yourself once you could no longer do the job?
The American Express Railroad Company was the first employer to offer a solution. In 1875, they announced to their employees they were offering them something called a pension.
The way it worked is the employee would pay a percentage of every paycheck to the employer. When the employee could no longer work, the employer would continue to pay the employee about the same amount he earned while working. The money came from the pension fund.
By 1960, the majority of all American workers were paying into a pension through their employer.
Pensions are great when they work.
But what if a company goes under? Or is acquired?
What if a company’s pension managers made poor financial decisions and lost all the money?
The more pensions grew in popularity, the more problematic they became….
Per usual, the government stepped in to solve the problem, but ended up only making it worse.
In 1974, Congress passed the Employee Retirement Income Security Act (ERISA), intended to regulate pension plans and hold companies accountable.
The problem was that ERISA came with so much red tape and required so much paperwork that companies slowly stopped offering pensions.
Today, in year 2020, pension plans are practically nonexistent.
Government employees, teachers and cops still have pensions but they are dangerous and considered insolvent.
So what came next?
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History of Retirement: Why We Invest in Stocks
Pension fund managers invested with caution to ensure there was enough money in the fund to pay back every employee.
This meant pensions invested in blue chip stocks and government bonds.
Things started to shift when a small provision was made to the ERISA Act.
The provision was located in section 401(k) and did not make a single headline.
Section 401(k) stated that employees could defer taxes on cash bonuses and stock options received by their employer.
Since this form of payment was uncommon it went unnoticed and is unclear who championed it in Congress.
But there’s no doubt it paved the way for the next phase in the history of retirement in America…
In September 1979, the president of a Pennsylvania bank was due a large cash bonus. He didn’t want to pay taxes on the bonus, so he hired a consultant to help him. The consultant, Ted Benna, discovered section 401k in ERISA and used it to legally allow the executive to defer taxes on his cash bonus. News spread, the idea caught on, and the 401k was born.
Corporations that offered pensions at the time dropped them like hot potatoes in favor of a 401k.
401(k)’s were better for corporations because the responsibility of an employees’ retirement was no longer on their shoulders.
Instead, that responsibility fell to the employee himself — just as it was before the year 1875.
If an employee invested his retirement money in a company that went bankrupt, he could only blame himself.
The corporations’ perspective is this: Why should an auto manufacturer with 5,000 employees also have to be a wealth management firm and handle their employees’ retirement money?
But is the auto factory employee supposed to also be an expert in finance?
Investing is not taught in school and even educated Americans don’t understand how the stock market works.
Why did the government approve such an arrangement?
Corporations were no longer responsible for the employee, but still benefiting from him buying the company stock through his retirement account. After all, if you’re an auto worker and know nothing about investing –you’ll probably buy stock in the company you work for, right?
Wall Street also won.
If a working American was uncomfortable investing in the stock market (understandable), Wall Street had a flood of new and naive customers to “advise.”
This history of retirement, and why we invest in stocks to fund our life in retirement, contributed greatly to the incredible wealth inequality we see in America today.
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The History of Retirement and Who Benefits
America is not a capitalist society, despite what you’ve been told.
America today practices corporatism.
This means our elected officials represent and work for corporations and special interest groups — instead of for the people.
The shift from capitalism to corporatism really took off during the 1970’s and 1980’s.
Do you think the politicians back then ever considered the consequences of asking Americans to manage investment portfolios just so they can retire?
Financial literacy is a foreign language in America.
Investing is not taught in schools. The average American has no clue how the stock market works.
This is who the arrangement benefited:
For the first time in history, people were told to send a percentage of their paychecks to Wall Street portfolio managers (via a 401k). These bankers would “oversee” their nest eggs. Whether their nest egg grew or evaporated, the banker still collected his fees. Wall Street in the 1980’s wasn’t notorious for nothing!
The Federal Reserve
When millions of Americans are pouring money into the stock market like clockwork every month, the stock market stays afloat. When the stock market is at all-time highs, the economy looks good and the Fed can raise interest rates to exercise control.
The stock market is a gauge for how the economy is doing. In order for the government’s retirement system to work, Americans must consistently invest in the stock market. If young people stopped investing, retired Americans would suffer because the flow of money into the markets is what keeps the markets afloat. If it weren’t for the stock market, the government has no other safety net large enough to support the elderly.
Public Pension Plan Operators
Government pension funds are screwed, and they know it. They mismanaged money and made promises they couldn’t keep. They need Americans, even today, to keep contributing to retirement accounts because it keeps stock prices up which helps alleviate their insolvency.
Overvalued, Over-leveraged Public Companies
The rise in index investing, which is a common investment strategy for retirement accounts, has helped lousy companies stay afloat. When the investor is buying every public company, instead of analyzing individual stocks, shitty companies benefit.
Related Reading: The Pros and Cons of Index Funds
Is the Stock Market a Ponzi Scheme?
When someone doesn’t know about something, they rely on experts.
In this case, the experts are corrupt Wall Street executives with one goal in mind: Make as much money off the customer as possible.
They tell us that investing our money in the stock market will make us very rich by the time we retire.
They say this is true because on average, the S&P 500 has returned 10% every year since 1926.
But as was pointed out in this Forbes article, the return on the S&P 500 was just 3.4% per year from 1999 through the end of 2017.
So which is it? 10% or 3.4%?
Both answers are correct.
On average, since 1926, the S&P has returned 10%. However, for an entire decade (from 1999 to 2009), the overall return was a negative 24%. Which is why the return from 1999-2017 is only 3.4%.
Can you imagine if you’d wanted to retire between 1999 – 2009? You would have looked at your account balance and decided to work for 5 more years….
Today, in year 2020, we are in one of the longest bull markets in history.
Will it go up forever? Maybe.
But the point is that average Americans don’t know what makes prices go up or down, don’t understand monetary policy and have no clue which companies they are supporting.
None of that matters to Wall Street, though.
They make money off you regardless.
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The History of Retirement Should Remind You There Are Options
You don’t have to invest in the stock market.
If your employer offers a match, then sure, invest up to the match — but remember that you have options.
It’s YOUR life and YOUR money.
- Real Estate
- Why not pay off your house? It’s an asset you understand. Rent it out if you want to move and earn passive income.
- Are you always going to just be an employee? Take the money you would have contributed to retirement accounts and start your own business!
- Life is finite. Don’t put off going back to school, living abroad, becoming certified in something, etc. Do it now!
- Investing has been narrowed down by Wall Street to mean investing in stocks. But you can open a Self-Directed IRA and invest in land, gold, cryptocurrency, real estate, tax liens, and dozens more asset classes.
- I’ve taken several risks in life and not one would have been possible if I hadn’t saved a pile of cash. Cash is underrated.
You can invest your money and prepare for retirement any way you want.
The government and financial services industry want you to think the stock market is the “safest.”
100% not true.
Use your head and think about why they want you to invest your retirement assets in the stock market.
Do you really believe they have your interest at heart?
Related Reading: How to Be a Conscious Investor
The History of Retirement Tells a Story of Manipulation
Saving for retirement is obvious.
But investing your retirement savings in the stock market? Not necessary.
The biggest misconception with tax-sheltered retirement accounts is that the employee benefits because they won’t have to pay taxes on the withdrawals until they are 65. They claim that by the time someone is 65, they will be in a lower tax bracket.
The government has no clue where tax brackets will be 30 years from now. Why would you trust a politician? Considering the enormous amount of debt our federal government has taken on recently, are you foolish enough to assume tax brackets will be lower in the future?
Only the present moment is guaranteed.
I strongly consider re-thinking your participation in a government-sponsored retirement plan. Each and every one of them guarantees to benefit everyone but you.
Wake up. And good luck 🙂