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Retirement Planning > Retirement Investing

The New Normal: As the Economy Faces Structural Change, So Does Retirement

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Let’s start with a bit of personal history. I used to commute daily from a suburb to a downtown financial district. It took me one hour or more daily and I thought nothing of it. Like gravity, it was something that was there and that one did not question much.

Then came the Internet. After a few years, the reality that moving electrons is a lot easier than moving atoms became overwhelming. The Internet moves electrons. Driving moves atoms, your atoms. Atoms are considerably heavier than electrons. The Internet made the daily trip to the financial district less necessary over time to the point where it is now exceptional. The commute now appears amazingly primitive and expensive when it has to take place. Daily life has become more virtualized than before. Nevin Adams, Editor-in-Chief of PlanSponsor and a former board member of RIIA, once remarked that the early years of RIIA were entirely created over e-mail with very few phone calls and even fewer face-to-face meetings. It seemed unusual at the time. It seems normal now.

These types of fundamental changes are hard on established institutions. I remember when a large financial institution faced a conscious decision about technological change during the early 1990s. I was working for a large bank and had a minor role in a corporate decision related to the implementation of an internal e-mail system. Over the years, most of us had managed to obtain a phone line, a fax line and a fax machine. Business cards even started to show both a phone number and a fax number. Employees met often (this still does not seem to have changed much in some environments) and we prepared for those meetings with phone calls, voice-mail messages (these felt very daring at the time as you could lose plausible deniability for what you said) and faxes for our draft memos and meeting presentations.

Shifting to e-mail did not seem very urgent, nor did it seem very necessary. At the time, you were not able to attach your draft memos or presentations to your e-mails. Not all employees wanted an e-mail address (senior management wanted to keep some distance from the rest of us). Not all employees felt that typing on a keyboard suited their fine-motor skills, let alone their social and business standing. In retrospect, it is amazing that the bank made a conscious decision to implement e-mail across the corporation. Needless to say, the bank was not an early adopter of e-mail. Much of the world had gone virtual before us, communicating, trading and creating value that we could not see.

Bureaucracies do not adapt readily to fundamental changes because they are all about homeostasis, keeping the status quo, attempting to “protect” the old structures. Bureaucracies have a way of fighting the last wars, not the current wars. We are in a fundamental transition from an old normal to a new normal. This transition is happening because too many promises have been made that can’t be cashed. Private debt is at an all-time high. Public promises are even higher still. The failure of these promises lead to de-leveraging.

Trust, the grease that helps business run, is in short supply. Credit comes from a Latin word meaning “I believe.” So many promises have been made that will not be repaid that we have lost our ability to believe, our ability to trust. None of this happens instantaneously. It takes time on the way up and it takes time on the way down. It is perhaps a bit faster on the way down.

Loss of Leverage

It is useful to remember that deleveraging is not an event but a process with short-term and long-term solutions. The old normal was about speed, greed and aggression. The new normal may be about playing defense. The last few decades were all about real change brought about by technology such as the Internet as well as by over-leveraging. The next few decades may be all about digesting this change.

The short-term solution may include:

o Taking a lot of time. Japan has been following this path for nearly two decades. This has not worked too well for them. Is it in the psyche of the American people to show the same patience?

o Letting prices fall to a clearing level. This would force many fictions to be revealed. How many bankruptcies can we take before the game stops?

o Reducing the size and the cost of government across the board. When will it be clear to all that — when pensions and benefits are factored in — the average government worker is more expensive than the average worker in the private sector? How long will those who make less and are less secure continue to fund those who make more and are more secure?

o Increasing savings. Numbers are already showing that American households are rebuilding their balance sheets. At what point does increasing savings come at the expense of consumption?

The long-term solutions will most likely include structural resets that derive from reduced leverage. Does this mean that the economy will have a lower level of business and consumer spending?

In mid-February 2009, retail-industry consultant Howard Davidowitz, chairman of Davidowitz & Associates, made a case that Americans’ standard of living is undergoing a “permanent change” as a result of: an $8 trillion negative effect on wealth from lower home values; a $10 trillion negative wealth effect from weakened capital markets; and a $14 trillion consumer debt load amid “exploding unemployment” that will lead to “exploding bankruptcies.”

These numbers have become even larger since then. Davidowitz expects a higher savings rate, and that Americans will be trading down not just what they buy but also what they aspire to. This is likely to extend to retirement. Retirement under the “new normal” is likely to be different from retirement under the “old normal.” Retirement under the new normal is likely to be about making do with less and for a longer time.

Francois Gadenne is chairman and executive director of the Retirement Income Industry Association in Boston; see


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