How Life Transformed in the 20th Century - and is likely to transform again in the 21st

A curious thing happened through the course of the 20th century: companies shifted their focus from making things to making money.

This may sound cliche but it is important. In 1900, the average home did not have running water, electricity, a car, a radio, telephone, TV, computer, store-bought clothes, frozen food, takeout, aspirin, a refrigerator, microwave oven, canned goods, sneakers, safety razors, shampoo, or credit cards.

Fortunes were made by the various companies able to produce those goods at affordable prices.
And then our curious thing happened: given these companies had gone public, they rather inadvertently created a new product: wealth. If you owned shares of a company that became successful, you could have one of the more curious products of all: financial independence.

Between 1900 and 2000, life expectancy rose from 47 to 77. (And no, this was not all due to infant mortality rates dropping. Your odds of dying at any age - from six months to 20 to 50 to 70 - steadily dropped during the 20th century.) Old age was popularized in the 20th century and retirement was invented.

Pension plans and 401(k) accounts took advantage of decades of compound interest over these newly long lives to create enough wealth to fund retirements. People no longer had to work until they died or rely on the generosity of their children. And of course there is variation in all things and as it turns out, some people don't have enough to retire at 85, some have enough by 65 and some have enough to retire by 45.

At a certain point, more goods have less appeal. Your closet has more clothes than you'll wear, your freezer and pantry has more food than you'll eat, and your garage had more things than you use.
An amazing, unprecedented economy emerged in the 20th century, providing goods that past generations could not have imagined. Of all the goods it made, though, perhaps the most alluring was its promise of financial independence. Of all the things that companies could make that people were eager to buy, wealth ranked highest.

It it difficult to properly understand modern companies if you still understand them as institutions focused on making things. That was largely true a century ago. Now, they are largely focused on making people rich. (What does Google "make?" Well, they have made a lot of people rich.)

Henry Ford became famous for making cars affordable for normal people. Previously, they were something only the very few, very wealthy could afford. The challenge of the early part of this century is to do something similar with companies' most interesting product yet: make ownership of wealth more widespread, more common.

Changing the Rules of War

I'd like to propose a new rule for war. Why not limit battle to those who are over 75?

This would have at least three benefits. One, it would mean no longer cutting short the lives of the young. Two, it would create a new kind of arms race: rather than just spend on defense, countries would be motivated to spend on health care, doing all they could to keep the 75 and older crowd vibrant, strong and healthy. And it would mean that when you spent more on war you would almost automatically spend less on retirement, helping with deficit reduction.

Of course, that would mean that the world's toughest job would be the new job of carding heavily armed soldiers to confirm that they really are over 75.

[And thanks to Sarah for posting a picture of her son in uniform, thereby provoking this thought.]

401(k) Accounts: Putting Off Paying Tax to a Higher Tax Rate Era

It’s not enough that baby boomers have just lived through one of the worst years in stock market history. It also seems that they’ve been duped on the tax-deferment scheme of 401(k) accounts.

The idea behind a 401(k) is not that you avoid taxes. It is that you defer them. Many people lose track of this, but if you put money into a 401(k) account today, you pay no taxes on what you invest.

For example, assume that your household income last year was $100,000. You put $10,000 in a 401(k), thereby avoiding $2,500 in taxes (25% marginal tax rate).

But you have to pay taxes on the capital and return of this invested amount when you retire. The general assumption is that your income in retirement will be lower so you will pay taxes at a lower marginal rate. You save by getting in on a lower tax.

Today Bernanke announced that the projected debt to GDP rate is unsustainable. Deficits will have to come down. Given that our last four “conservative” administrations (Nixon, Ford, Bush and Bush) failed so spectacularly to slow the growth of government, it seems inevitable that reducing deficits will ultimately mean raising taxes.

What does this mean for baby boomers? They might just have avoided lower taxes for higher ones.

I find it perfectly plausible that the people who avoided $2,500 of taxes when working will pay $3,500 in taxes when retired.

Market Plunge & Baby Boomers Bust

"Do what you love," they said. "Find work that you enjoy."

Now, finally, they tell us that this is because we are going to work into our late 80s.

10 years ago, about 80% of retirement plans were pension plans. If you work for 30 years and you are 60 years old, you'll get, say, 90% of your salary until you die.

Today, about 80% of retirement plans are 401(k), or IRAs. If you save for 30 years and you are 60 years old, you could be rich or you could be a pauper - no one knows. And the money you've saved might be enough to finance your retirement and your children's retirement - or might scarcely be enough to finance your grocery store habit through the end of next month.

This market crash is coming at a terrible time for the baby boomers who have just begun turning 60. To have the market drop by 30 to 40% just years before you were going to retire is terrible. No one has talked about the fact that their retirements have just been delayed by years. By the time the dust settles on this year, they may be the group that pays the biggest personal price.