It happened so fast, some people still don’t recognize the shift that has taken place, but a technological trend four decades in the making has ushered in a new economic paradigm, seemingly overnight. And as a result, many financial ideas that were once seen as cutting-edge solutions may become economic dinosaurs, ill-prepared to survive the changing times.
Moore’s Law = More work for machines, less for people
Marshall Brain, the founder of the “edutainment” company How It Works, recently posted a commentary on his website titled “Robotic Nation.” In the article, he detailed the events of a recent Saturday morning with his kids:
- I got money in the morning from the ATM.
- I bought gas from an automated pump.
- I bought groceries at (a warehouse club) using an extremely well-designed self-service check out line.
- I bought some stuff for the house at (a do-it-yourself home maintenance store), using their not-as-well-designed-as-(the warehouse’s) self-service check-out line.
- I bought my food at McDonald’s at the kiosk.
*(The kiosk “as described above” allowed Brain and his children to place their order remotely from the McDonald’s playspace.)
In 1965, Intel co-founder Gordon Moore noted that the number of transistors that could be placed inexpensively on an integrated circuit had doubled approximately every two years since the invention of the first integrated circuit in 1958. Moore postulated that this pace would continue, for at least the next 10 years. This statement, which became known as Moore’s Law, proved true, and not just through 1975, but for another 35 years. And while no one believes computing capacity will double forever, the latest projections are that Moore’s Law will continue well into the next decade.
Moore’s Law explains how digital technologies and devices have moved from science fiction fantasies to everyday necessities in every part of the world. It doesn’t matter if it’s agriculture, manufacturing, the retail and service industries, or various professional fields. The technologies that have come about as a result of Moore’s Law – fax machines, personal computers, digital cameras, cell phones, bar scanners, GPS systems – have redefined employment in every sector of the economy.
In theory, these new technologies benefit the consumer. They are faster, easy-to-use, and lower the cost of doing business, which usually translates to lower prices. But Brain, a technology advocate, also sees a downside:
“The problem is that these systems will also eliminate jobs in massive numbers. In fact, we are about to see a seismic shift in the American workforce. As a nation, we have no way to understand or handle the level of unemployment that we will see in our economy over the next several decades.”
Mr. Brain’s observations have been echoed in a number of commentaries describing a “Jobless Recovery” from the recent recession. In a January 17, 2012, Wall Street Journal article, W. Brian Arthur, an economist at Xerox Corp.’s Palo Alto Research Center, says businesses are “increasingly using computers and software in the place of people in the nation’s vast service sector. Many companies, for instance, use automation to process orders or send bills.”
“It’s not just machines replacing people, though there’s some of that,” Mr. Arthur says. “It’s much more the digitization of the whole economy.”
The article goes on to note that the United States is second only to Japan in the use of industrial robots, and that “orders for new robots were up 41% through September from a year earlier, according to the Robotics Industries Association trade group.”
What Happens Next?
If the history of technology holds true, increased productivity from technology eventually creates new jobs and raises living standards, and those whose jobs are replaced by automation will move on to other fields. The current challenge is that the technological rate of change is occurring so much faster than the creation of new job opportunities, with the obvious consequence of higher unemployment. Another ripple effect is under-employment – many people with jobs aren’t working full-time.
Charles Murray is the author of “Coming Apart”, a study of how income and employment has dramatically changed in America in the past 50 years. A key finding is a significant increase in what Murray calls “prime-age adults” (males ages 30-49) who work fewer than 40 hours a week. For men with only a high-school education (Murray’s “working class”), his research found that fully 20% of those working were not employed full-time.
Other studies focusing on this age 30-49 group show similar trends in income and employment instability. A January 2012 study from the Insured Retirement Institute (IRI) titled “Retirement Readiness of Generation X” reported that almost one in four of those surveyed had stopped contributing to retirement accounts, while another 15% had made early withdrawals. Most cited fallout from the recent recession, i.e., job loss, reduced wages, etc., as the reason for disrupted savings.
If the trend toward automation continues, particularly in large companies, where will these displaced employees find work? One likely answer is self-employment. In a paper presented to the Federal Reserve Bank of Atlanta in November 2011, New Mexico State University economics professor Anil Rupasingha found “self-employment has surged in the last decade and will continue.” Citing Bureau of Labor Statistics data that showed 31% of the labor force was self-employed in 2011 – and was projected to represent 40% of the work force in 2019 – Rupashingha concluded “For some, self-employment may be their best hope.”
Unemployment, Under-employment, Self-employment…“and the 401(k) fits where?”
The first 401(k) plans were established by congressional legislation in the 1980s to encourage workers to defer earnings for retirement. Deferred wages deposited into the plan, along with subsequent earnings, remained non-taxable until the time of distribution, which was ideally intended to occur after age 59 ½, and not later than age 70. The employer administered the plan, provided investment options, and often encouraged participation through the addition of matching deposits. Under certain circumstances, 401(k) account holders could also access funds prior to retirement, either as loans or pre-retirement distributions.
In a static employment situation, where steady paychecks and long-term employment are the norms, the 401(k) seems like a sound concept. Even today, generic financial advice from mainstream media still usually includes the phrase “max out your 401(k) contributions.” But the viability of a 401(k) hinges on ongoing employment and a steady income. Given the changing dynamics of employment, making 401(k) contributions a financial priority may be committing to an approach that is no longer well-suited for the current economic climate.
Suppose your household encounters a period of under-employment; overtime is eliminated, bonuses are cut, or a spouse loses a job. To bridge what is anticipated to be a temporary situation, many workers end up tapping their 401(k)s. Distributions from 401(k) accounts, either as loans or early distributions, may be limited by plan regulations and/or incur tax consequences, including penalties. Thus, when 401(k) funds are used as cash reserves, the cost of access could be significantly higher than the tax advantages that were given on the deposits – and the situation is exacerbated if the 401(k) participant terminates employment with an outstanding loan. In short, a 401(k) is not well-suited for use during periods of under- or unemployment.
Similar qualified retirement accounts for the self-employed and smaller businesses (such as IRAs or SEPs) face the same challenges regarding early distributions, albeit with slightly different regulations. But other factors work against using qualified retirement plans for the self-employed. Income from self-employment is often irregular, both during the year, and from year-to-year, which can make regular deposits problematic. Early on, cash flow may not even allow for deposits. If the business grows over time, a profitable self-employed individual may find deposits restricted by annual contribution limits – “Now that I’m making a lot of money, I can’t find a place to defer it for retirement!”
Better Accumulation Plans for an Irregular Employment Future
Every year, Congress, in conjunction with economic policymakers, contemplates adjustments to existing qualified retirement plan regulations. But most of these changes are tweaks; they don’t change the fundamental structure of retirement accounts. Rather than trying to continue working within the confines of a model that may not be suited for irregular employment, individuals might be better off considering alternatives. If so, what features should be part of an “Irregular Employment Accumulation Account”? (Some marketing guru needs to come up with a better name; an “IEA Account” just isn’t catchy.) Here is a partial list:
Flexible deposits and withdrawals. Liberal contribution regulations would provide the option of adding excess deposits in good years, or forgoing deposits in lean periods.
Tax advantages. If you aren’t using the money, it would be beneficial to eliminate or minimize carrying costs (such as the taxes on interest and capital gains).
Safety. Given the possibility that some funds may be required to replace income in the near future (such as between employment), these accounts should include conservative investment vehicles, preferably ones with guarantees.
Accessibility. Loan restrictions, surrender charges, and tax penalties in many financial products are practical deterrents to discourage the liquidation of long-term accumulation vehicles. But if the need or opportunity arises, access options should be possible with a minimum of restrictions.
Personal ownership and portability. Regardless of employment, and particularly in periods of unemployment, this account should be under individual control, and capable of fitting into future employment scenarios.
Adaptability and long-term value. A standard feature of personal planning for the past three decades has been to compartmentalize financial objectives and find a specific product for them, i.e., a separate account for cash reserves, retirement, college education, medical expenses, etc. Considering the ups-and-downs of irregular employment, a “multi-tool” accumulation account that can serve several purposes over one’s lifetime would be attractive.
Does such a financial vehicle exist? The best answer is “yes and no.” Profitable self-employed individuals have been working with these ideas for awhile now. A competent financial professional can probably help you construct a financial program with many of these features, although they may not be combined in one product. And if the current trend in irregular employment continues, you can be sure the marketplace will develop new products. Is there a congressionally-authorized IEA account? Not yet.
Consider your current employment circumstances and your future prospects. How has technology changed your work in the past decade? Are more automation and fewer people a possibility? More to the point…
HAS THE 401(k) BECOME A DINOSAUR IN YOUR FINANCIAL WORLD? IS IT TIME TO CONSIDER ALTERNATIVES?