Women Are Better Investors Than Men But The Pension System Is Fatally Flawed

Women are better investors than men but most people are pretty lousy. Individual- directed retirement accounts are structured to fail and recessions reveal their fatal flaws. Recessions are like low tide when dead fish and garbage on the shoreline are revealed. Investors follow markets and trends and buy into bull markets. Behavioral economists agree that when markets go up investors tend to think of themselves as wise investors, and when markets go down, they think of themselves as victims of circumstance.

Just because women are better investors than men—as the Financial Times TFSL coyly reports, summarizing new data from a Vanguard analysis of their clients’ behavior—it doesn’t mean a voluntary “do-it-yourself” retirement model is robust, efficient, or effective. I predict as the COVID-19 recession proceeds in the UK and the United States, where pensions are highly financialized, people will sell assets from their long-accumulated funds targeted for retirement as they freak out.

Yesterday, my distant relative calls me up for affirmation. “Last week my 401(k) fell 30% and I took it all out and put it in my checking account. It’s safe there.” (This person is a lawyer and former bank examiner.) The relative didn’t get my nod of approval, but I was sympathetic.

According to the Vanguard study, 7.5% of male headed households traded in March when markets were tanking compared to only 4% of female-headed households. Reading the actual report reveals something a bit different and so far reassuring. Vanguard DC holders—who are a minority of DC account holders and among the wealthiest—did very little trading between February 19 and March 20. My eyes are on the next few months because if history is a good predictor of the future, people experiencing hardship will draw down their accounts and people experiencing fear will act by selling or buying.

The COVID-19 recession is signaling hardship for 40 million American workers over the age of 50. According to preliminary results from our predictive model of retirement financial well-being and the St Louis Fed’s estimates of who is at risk of losing their jobs in the U.S., we find that if 20% or more older workers lose their jobs in the COVID-19 recession at age 55—and for that and other reasons experience an average pay cut of 20% and draw down their retirement savings each year to replace half of their lost earnings until age 65—they will maintain their living standards for just 1.0 to 6.1 years. The range depends on their income class. The lowest income workers do not do as well in maintaining their living standards into retirement as higher-income workers. Regardless of socio-economic class, we find all workers nearing retirement will be downwardly mobile and those at the bottom will fall into de facto poverty, some severe poverty.  

As I and others persistently point out, Americans do not have enough financial resources to retire and maintain their living stands. Recently, the U.S. Government Accountability Office issued a comprehensive study showing American workers are not financially prepared for retirement. Forty-eight percent of older households have “no retirement savings” and will have to rely on Social Security benefits. The average benefit is a bit above $1400 per month or $16,800 per year, which is below the de facto poverty level for an elderly household.

The median account balance of someone with a retirement plan and nearing retirement was about $100,000 before the market tanked.

I know that the women-men comparison was the fetching lede for a daily newspaper, but the important story is buried. Leaving long-term investing to individuals who have to make professional decisions to secure their financial future for their entire life is setting up households for failure. But maybe that is the point. If the government and employers set up a DIY retirement system it’s easier to blame the victim when the system fails.

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