Introduction:
Beware of Phantom Wealth

THE IDEA OF USING STOCKS to solve the Social Security problem seems like a “good, long-term, quick fix.” The idea is so alluring, it just keeps coming up. But before jumping to that conclusion, we should be sure that we understand the problem, retirement plans in general, and what stocks really do.

The Five Main Messages of This Book

This book was written to present five major messages.

1.Much of the country’s economy and many of its retirement plans are built on a structure of phantom wealth that depends on stock prices.

2.Stock prices are based on projected future events or what people hope will happen, not on actual corporate accomplishments. Using stock prices to measure wealth is like counting chickens before they’ve hatched.

3.The drive to create phantom wealth by inflating stock prices helps some people, but it distorts the economy and hurts society as a whole.

4.Demographic trends and retirement plans are helping to build the phantom wealth structure. But unless the structure is replaced with one that is more sustainable, those same trends will eventually make it fail, and that in turn will drag down the retirement plans and the economy.

5.Individuals and organizations can help prevent retirement plans and the economy as a whole from collapsing—or protect themselves in case there is a collapse—by creating real wealth based on work, earnings, and solid accomplishments, instead of just hopes. But doing this requires a different mindset that includes new values, goals, and ways of thinking about living, aging, investing, and running companies.

These five messages apply to individuals and their retirement plans, to all the country’s retirement plans in the aggregate, and to the whole economy.

What Is Phantom Wealth?

A phantom is something that appears to be but has no real or physical existence. Like an apparition, a shadow, a dream, or a vision, a phantom is not what it seems to be.

Throughout this book, we use the term phantom wealth to refer to the returns from corporate stocks that are based on market prices. Individuals, companies, investors, retirement plans, and the country as a whole are ignoring the transient or ephemeral nature of trillions of dollars of phantom wealth. The opposite of phantom wealth is real wealth, and it has very different characteristics. We will explore how phantom wealth is created, how unreal it is, and how quickly it can vanish.

Will Baby Boomers Have Enough Money to Retire?

Nearly everybody knows the conventional explanation of how capitalism works. It starts with people saving money, which they invest in companies, which use the money to build plants, buy tools, develop new products, and create jobs. The companies grow, their stock prices go up, the investors are happy, the economy prospers, and all is well.

Based on that explanation, millions of American workers—who can expect to live longer than any previous generation—are being told that their formula for years of comfortable retirement is simple: just be guided by the history of the stock market, buy stocks, and retire on the gains. Companies, state and local governments, and many other employers are using the formula to reduce the costs of pensions that they have promised their employees.

But the explanation is insidious. It sounds right and it seems to explain why the economy is doing so well. The concept has endured for decades. It has few detractors and even the collapse of the Soviet Union increased its general acceptance. It is particularly appealing to those who are benefiting the most from today’s stock-driven economy. And it contains enough truth to save it from being labeled fiction.

For many reasons, however, the explanation has gradually become more fiction than fact. One reason is that little of the money that most people use to buy stocks for retirement accounts ever gets to the companies. Instead, it goes to previous stockholders through trades that often help increase stock prices, thus increasing the base on which phantom wealth is built.

As we will see, there are few positive links between the stock market and large companies. There are negative links, however, that work backwards from the conventional explanation. Important parts of the economy are running in spite of the stock market rather than because of it.

Even the prevailing formulas that are used to manage retirement accounts have a fatal flaw. Based on these formulas, baby boomers are buying large quantities of stocks and inflating the prices. But nobody knows what prices they will receive when they have to sell their stocks for retirement income. We will explain why there are serious risks that the stock-based retirement formulas may turn out instead to be formulas for an economic depression.

Money Isn’t Everything

We in this country are constantly being bombarded by magazines, television programs, Internet sites, investment advisory services, brokers, and even banks purporting to explain how easy it is to make money with stocks. The financial services industry has large advertising budgets to convince us that if we save and invest in stocks, we can plan to enjoy years of retirement. All we need to do is buy enough of them soon enough and build a kitty that is large enough.

If you sense that something is missing in all this advice, you are right. As this book goes to press, the appealing idea that one can get something for nothing and create wealth out of thin air is working. But for baby boomers’ retirement plans, the idea is fundamentally flawed, because it rests almost entirely on phantom wealth and transfers of money from workers to retirees.

Some members of the baby boom generation will have enough money to retire in comfort when they choose to. But as we will discuss, millions of other boomers will have meager retirement incomes, and many of them who hope or expect to retire will find that they have to work well beyond their mid-sixties.

It is important to understand that a sustainable system for older people involves a lot more than just money. It must provide adequate supplies of the things that money is used to buy, including the broad array of goods and services that are needed by most people of limited means. The economy now serves affluent people of all ages better than those who are less well-to-do.

A sustainable system must provide opportunities for millions of people to work at jobs that are appropriate for their interests, capabilities, and limitations. As a growing fraction of the country’s adults live longer, they will have to help make the pie from which they will receive their slice.

Finally, a sustainable system must encourage people to find satisfaction and fulfillment by living more simply and within their means, limiting the amount they consume. This will be both an economic and an environmental necessity. Indeed, the consequences of this country’s aging population will reinforce points that environmentalists have been making for decades.

Related Views

Many books have already discussed some aspects of what we will discuss here. Three of the best present a triangle of concerns.

In The Post-Corporate World, David C. Korten explains in extensive detail how large corporations are shaping the world to serve their own ends and the ends of their stockholders as opposed to communities, society, and the environment.

In The Emperor’s Nightingale: Restoring the Integrity of the Corporation in the Age of Shareholder Activism, Robert A. G. Monks explains how large corporations are out of control from a social standpoint and suggests that large institutional stockholders such as pension funds should bring them into line to better serve society.

In Gray Dawn, Peter G. Peterson explains how the populations of most developed countries are aging even faster than America’s, and he discusses the social, political, and economic dislocations that may be expected to occur throughout the developed world.

These are strong books by responsible authors who have wide business experience and deep concerns for this country. They have different ideas about what should be done, but in combination they show the need to review where the country is today, where it is going, and why effective actions must be taken while there is still time to prevent disaster. The themes about corporations, investments, and aging populations that run throughout these books provide a good background for the five main messages of this book.

The Challenge

Those three books present the country with a challenge, but the challenge is even bigger. In The Fourth Turning, William Strauss and Neil Howe explain five hundred years of Anglo-American history as a series of cycles. Each cycle includes four seasons or turnings. As the authors describe them:

The First Turning is a High, an upbeat era of strengthening institutions and weakening individualism, when a new civic order is implanted and the old values regime decays.

The Second Turning is an Awakening, a passionate era of spiritual upheaval, when the civic order comes under attack from a new values regime.

The Third Turning is an Unraveling, a downcast era of strengthening individualism and weakening institutions, when the old civic order decays and a new values regime is implanted.

The Fourth Turning is a Crisis, a decisive era of secular upheaval, when the values regime propels the replacement of the old civic order with a new one.

The authors say that the cycles tend to be repeated roughly every eighty to one hundred years because no one lives long enough to remember and avoid the mistakes that were made during the corresponding phase of the previous cycle.

Strauss and Howe assert that, at the beginning of the twenty-first century, the United States is about to enter the Fourth Turning, or the crisis phase, of the current cycle. This cycle began as World War II came to a close, just before baby boomers started to appear. The authors predict that the next crisis phase will be similar to the crisis phases of the two previous cycles: one that included the Civil War and the other that included the Great Depression and World War II.

They predict the next crisis will start early in the twenty-first century—just when demographic trends are going to roil most developed countries, according to Peterson. Strauss and Howe don’t think the next crisis can be prevented because they don’t believe people can learn from the earlier crises and act to prevent it.

They may be right. But do they have to be?

What If Boomers Can’t Retire? was written in the belief that if enough Americans understand what is happening and where their actions are leading them, they will be able to make the changes necessary to prevent another crisis that could include the depression that Strauss and Howe predict.

This country is exceptionally lucky as it enters the twenty-first century for three reasons:

Rarely is it possible for people to see an impending national disaster in time to prevent it from happening. This is one of those few times.

As the five major messages of this book show, the present situation is easy to understand.

America has a history of responding to challenges.

Will the United States rise to this challenge as it has risen to challenges so many times before?

Highlights

Each chapter in this book includes one or more Highlights, brief summaries of important points made in the chapter. The Highlights form a logical chain to support the book’s five major messages. The following list of chapters and their Highlights provides a summary of the book.

Chapter 1: Social Security: The Tip of the Retirement Iceberg

1. Today, there are about 35 million people over age 65. By 2030, that number is expected to double.

2. The Social Security problem is that more people are living longer and expecting to receive retirement benefits during their additional years that will have to be paid by relatively fewer workers.

3. Stocks can’t solve the Social Security problem because to help pay retirement benefits, they would have to be sold to the same workers who can’t continue the program as it operates today.

4. The so-called solutions that would use stocks to solve the Social Security problem would have far worse consequences and would make the program even weaker.

Chapter 2: Can Stocks Help Baby Boomers Retire?

5. The stocks-for-retirement (SFR) cycle has a front, or build-up half, and a back, or selling half. Today everybody is concentrating on the front half and ignoring the back half.

6. Demographic projections and stock-buying patterns indicate that only about half of the workers who will be contributing to Social Security will have enough income to buy retired boomers’ stocks.

7. System-failure analysis shows that the stocks-for-retirement cycle probably can’t work for most baby boomers because the most critical requirement of the cycle—adequate buying power—will be missing.

8. There are just two possible sources of returns from stocks—from within a company and from outside. The difference is critical.

Chapter 3: Views from Eight Other Books

9. Investment advice varies widely and is often contradictory.

10. Much investment advice for boomers is irrelevant or wrong.

Chapter 4: How Baby Boomers’ Later Years Will Unfold

11. Many boomers are going to find themselves surprised when they learn they can’t retire as they anticipate.

12. The effects of aging baby boomers may cascade throughout the economy.

13. The trend toward retirement self-sufficiency will force many boomers to decide how long they expect to live. That is the Impossible Decision.

14. Before the country increases its dependence on the stocks-for-retirement cycle, it should do and publicize a due-diligence, system-failure analysis that shows how the cycle can work.

Chapter 5: Stocks, Wealth, and Phantom Wealth

15. Productive investors provide money that companies use to create real returns and real wealth. Parasitic investors don’t know or care who gets their money, and the returns they seek come primarily from outside the company as phantom wealth.

Chapter 6: The Drive to Create Phantom Wealth

16. Phantom returns can make a few people appear very rich—at least for a while.

17. The drive to create phantom wealth hurts people, companies, communities, and society.

Chapter 7: Why Stock Prices Don’t Create Real Wealth

18. Only shares of a public corporation’s stock that trade set the price, but all shares are treated as being worth the price of the last trade.

19. Stock prices result from the balance between supply and demand, but the balance is not as freely determined as market theorists say it is.

20. Stock prices aren’t a realistic basis for evaluating either companies or retirement portfolios.

Chapter 8: How Phantom Wealth Hurts the Economy

21. The drive to create phantom wealth has many hidden costs.

Chapter 9: How We Can Meet Our Real Needs

22. The phantom wealth structure is based on false expectations. The way to replace the structure is to remove the expectations.

Chapter 10: What Individuals Can Do

23. Millions of individuals can help change the course of history by looking ahead and acting in their own interests and the interests of the country.

Chapter 11: What Organizations Can Do

24. The most important steps that organizations can take are to evaluate the national stocks-for-retirement cycle and, if they find that it is unreliable, to evaluate retirement portfolios realistically.

25. There are vast opportunities for organizations that pioneer new types of sustainable investments, investment instruments, financial institutions, and business organizations.

Chapter 12: Conclusion: How to Change a Very Big System

26. The key is to change a few critical things that will cause many other changes to ripple out and eventually to cascade.