Don’t sell now. I know you are watching your balances tumble and news it could be worse in the near future. Despite the urge to do, don’t. Doing nothing is hard when you are both disgusted by the stock market and like all humans you have a “bias to action" – in face of discomfort humans tend to act. Know now the only action to be taken is reflection. If you want to do something, assess your debt and check your monthly income and spending. Make sure you have a budget for holiday shopping. Set a date in the future – I like mid-February after the dust has cleared for the holidays – to assess your investment goals.

Above is advice, next is math. Tony James, my coauthor of Rescuing Retirement and Executive Vice President of Blackstone  did these calculations to help convince you to stay the course.

From 1970 to 2016 there were 11,620 trading days. If you missed the 25 best days your return would go from 6.7% to 3.4%. In other words a $100 invested in 1970 and taken out of the stock market for just 25 selected days over 46 years that $100 would be worth less than $500 today. If you left that $100 alone you’d have approximately $2,000.

I repeat: if you took your money out of the stock market for just 25 selected days out of 11,620 days you would have lost 75%.

Here is another way to understand the gains of staying in. From 1978 to 2018, 40 years, there were only six negative years. If you invested $1000 in 1978 you would have had $96,000 at the end of September 2018 for an annual return of 11.82%.

The above math shows the importance of the long-term in the stock market but it does not mean I dare not give a normal person advice to own 100% stocks 100% of the time. Also, 60 years olds should not have all their wealth in the stock market. I am saying staying in, especially in bad times, is better than timing.

What is happening? My colleague Dr. Anthony Webb points out there are only two reasons stock prices decline: 1) the prospects for profits have dimmed, or 2) future profits are being discounted because of a mood or panic. Trouble is we will only know whether fundamentals have changed after a year or two. But probably yesterday and today’s volatility were based on expectations, it is not likely that something fundamental has happened in 24 hours.

It is a shame that this country depends so much on individual financialized retirement accounts which are vulnerable to panics. The current system does not provide most workers with professionally-run investment portfolios and it requires workers to do what they aren’t equipped to do – convert sums to lifelong income and to adopt a professional investment discipline. Worse, is that workers, knowing they need help turn to conflicted investment professionals who do not have their best interest at core. We need a simple, professionally managed retirement account for everyone.

The system needs help and so do you but this is not the day to act.

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It might not be a stock market crash  -- conventionally crash mode is a 10% drop or more -- but it might feel like one. On Tuesday Dec. 4, the S&P 500 fell -3.24%. Based on estimates from Monique Morrissey of the Economic Policy Institute when one considers stock holding of $5.2T in 401(k)-type accounts and IRAs, the retirement savings for all Americans fell by $155 billion yesterday. About 55% of the 24 million older American workers, age 50-64, who had,generously, $100,000,  their account balances fell by $1,620 in one day. That kind of hurts. If that goes on it can hurt more.

If the market falls like it did in 2008-2009, these 13 or so million older workers would lose over $20,000. And, they simply won’t have time to recover especially if a family member loses their job and they have to take Social Security early.  As I have written before  the morbid joke about the Great Recession was that it turned Americans’ 401(k)s into 201(k)s. Indeed, the nation’s 401(k)s and IRAs lost about $2.4 trillion in the final two quarters of 2008. In 2008, those aged 30-50 had a median return of -30%. Over half of people over age 60 with 401(k) and IRAs lost more than 20%, according to Hewlett.

What kinds of retirement plans are affected by stock market changes?

Practically, every 401(k)-type account and IRA will be affected by changes in stock and bond values, even if many 401(k)s or IRAs are diversified into real estate, private equity and other alternative plans because the value of the assets in plans are affected by the price of equities to some degree or another. To be more precise, how much of an impact the volatility has depends on what funds employees are invested in, how much of their portfolios are allocated to those investments, and when they plan to retire.

Why traditional pensions and Social Security are better for times like these.

The Great Recession of 2008–2009, the worst recession since the Great Depression (1929–1937), reduced national wealth by 10%, or $15 trillion, in 2008. Between December 2007 and December 2009, employment fell by 5.7%—a loss of 8.3 million jobs—and the unemployment rate peaked at 10%. Because of job, income, and wealth losses, consumers spent dramatically less in every major expenditure category from 2007 to 2010, and almost 39% of households experienced job loss, an underwater mortgage or other significant declines in wealth.

But the government pension programs came to the rescue. Built-in automatic stabilizers injected billions of dollars into the spending stream of the economy. Traditional automatic stabilizers such as unemployment insurance (UI) and the progressive tax system helped the Great Recession avoid becoming a colossal depression. But overlooked is Social Security’s Old-Age and Survivors Insurance (OASI), Social Security Disability Insurance (SSDI), and traditional defined benefit plans' effect on righting the failing economy. Households turned to these programs for income and life-style support. For the reasons we saw above, the financial market–based retirement programs, such as 401(k)-type programs, did the reverse and hurt the economy.

Tomorrow

What savers are told to do (nothing and stay calm), what they do (sell), and want they feel like doing (flee) are all different. Age and size matters a lot in how the stock market matters. If you are 30 and you have $20,000 in your IRA you are told not to worry and you probably don’t. You cheer and say it’s a great day to buy stocks. If you are 60 and have $200,000 and lost $6,000 you worry. You may want to leave the market so you never have to worry like this again.

I am worried. And not because I don’t have a lot of stock, I do. I am in TIAA, which helps me annuitize, and I have a lot of time before I retire.

I worry because 10,000 people will turn 64 every day for another 8 years, and half have financial market-linked retirements so that the sheer numbers could affect macro behavior; depression over the loss of wealth could trigger widespread deleveraging and suppress economic growth.

The stock and bond markets open tomorrow. It is closed on Wednesday, December 5 in recognition of the national day of mourning following the death of former President George H. W. Bush. Regular stock and bond trading will resume on Thursday.

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On the plane to a family Thanksgiving a nice seatmate asked what kind of work I do (as she watched me struggle with a spreadsheet). I brightly told her I am an economics professor working to expand pensions to solve the retirement crises. She looked at me blankly and said, "I'm Canadian, we don't have these problems."

That stopped me short. Really? Canada? Has the friendly nation to the north figured it out?

Canada has been described, in jest of course, to be a lot like Montana with a national railroad. Certainly, the U.S. and Canada are similar and any difference doesn’t lie in our two nation’s goals for retirement. Canada, Ireland, the United Kingdom and the United States use what is called the “Anglo-American” model to arrange retirement that consists of relatively small public pensions combined with tax incentives for voluntary employer-based pensions and 401(k)- type plans.

But, the outcomes are pretty different in one important respect. The elder poverty rate in the U.S. is twice that of the Canadians (23% versus 11%) (Both countries need improvement: Canada, like the U.S., lags well behind most European countries by tolerating much more poverty among their elderly.) Canada’s lower poverty rates is due in part to Canada’s more generous minimum pension, funded by taxes from all wealth and income and not just earnings like Social Security does. However, Social Security isn't shabby -- without it U.S. elder poverty rates would more than double to a whopping 39% elder poverty rate.

U.S. Top Heavy Tax Breaks 

University of Toronto Professor Keith Ambachtsheer suggests the U.S. poor performance could also be because, ironically, the U.S. gives larger tax breaks to retirement plans. How would that hurt? The tax breaks are skewed to the highest-paid workers and do little to help middle and lower-income workers. An American worker under age 50 can contribute 100% of their income, to a maximum of $18,000, to a 401(k), and another $5,500 to an IRA, in addition to any defined benefit pension the job might offer. “Catch-up” contributions (for those age 50 and up) raise those limits by $6,000 for 401(k) plans and $1,000 for IRAs. The self-employed and executives with deferred compensation plans can contribute thousands of dollars more. Bottom line: in the U.S. the tax savings are skewed more heavily to the rich: The top 20% get about 70% of the tax benefit. In contrast, Canadian workers contributions to the “Registered Retirement Savings Plans” can’t exceed 18% of a worker’s pay up to a maximum contribution of $24,930. That limit is reduced by amounts accrued in traditional pensions. Canadians also can contribute up to $5,500 to a Tax-Free Savings Account, or TFSA. And, in 2012, Canada adopted a new kind of voluntary supplement to their state pension system called, the Pooled Registered Pension Plan (PRPP). The new plans were aimed to encourage participation among Canadian workers, but they are voluntary so coverage is low.

Voluntary Doesn't Work

The Canadian plan has some good features Americans don’t have. Canadian workplace retirement plans are portable, and even better, if someone adopts a PRPP, the funds are pooled in professionally managed funds. Fees are smaller than in individual plans, and the pooling and investment diversity lower employers’ and employee’s investment risks.

Again, Canada Wins Health Care 

Another big difference between the countries that make Canadians better off, to no one’s surprise, is health care. Canada’s system is funded by the government and accessible to all without co-pays or deductibles. The United States has Medicare for people 65, but the program doesn’t cover dental, vision, hearing aids, and long term care and premiums and co-pays can be high. Medicare covers only about 60% of their health care costs.

Low Savings Rates and Dark Clouds 

The savings rate in Canada has dipped to the lowest in more than a decade, a sign economic growth may be nearing an end and that the Canadian retirement system is poorly designed. Statistics Canada reported at the end of November 2018 that the household savings rate, which represents the proportion of disposable income that remains after spending, fell to 0.8% in the third quarter, the lowest level since early 2017. Canada's savings rate averaged 1.4% over the last year, the lowest since 2005 and much lower than in the U.S.

The household saving rate in the United States is decreasing, but it is higher than in Canada. The rate decreased to 6.60% in August from 6.70% in July of 2018. Personal savings in the United States averaged 8.83% from 1959 until 2018, reaching an all time high of 17.30% in May of 1975 and a record low of 2.20% in July of 2005. Recently it peaked, as savings rates do in recessions. In 2009,  the U.S. savings rate was high, at 12%, when households deleverage rather than borrow, households reduced spending. The U.S. saving rate is now lower than it was in the 1970 and 80s. Many factors determine savings rates,  for instance, the average age of the population, economic cycle etc, but there is no doubt that the built environment of retirement savings makes a big difference.

The low savings rate leaves Americans and Canadians more vulnerable to an economic shock.

And, don’t be too fast to blame consumer overspending and too much luxury consumption of avocado toast and fancy lattes. Humans have always given into immediate gratification and not caring about the future. Humans haven’t changed; pension design has. Stop blaming the victim. Both nations have flawed retirement saving systems. Pension plans in the 1980s helped households build up buffers.  DB plans were used for many things, they were especially valuable tools to off-ramp workers in recessions. In contrast, people with DC plans clung to their jobs, making the recession worse.

My coauthor, Tony James, Executive Vice Chairman of the investment firm Blackstone Group, and I propose the Guaranteed Retirement Plan, a universal plan that would cover 63 million American workers who have nothing but Social Security. The GRA supplements voluntary plans and covers everyone who doesn’t have a plan. The GRA is simple and anxiety-free because it is pooled, like the new Canadian plans, and the principal guaranteed. The GRA proposal mandates full funding paid for by workers, employers, and government. Since the accounts are pooled, they are safer and more efficient than individual – directed plans because the proposed GRA funds are invested in low-cost professional portfolios.

We need to restructure the Anglo-American retirement model so everyone is covered and every dollar saved for retirement is managed well. And, this is the moment for a bold restructuring of American retirement plans as both nations face a both a coming recession and population aging.

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The strong Democratic showing in the 2016 midterms was puzzling. With historically low unemployment rates, better than expected GDP growth, low inflation, and the deep Republican tax cuts, why weren’t voters more grateful to the incumbent party?  One guess is discomfort with President Donald Trump—and by association the Republicans. But that isn’t enough of an explanation. Despite the strong economy, voters worry the economy and Republicans will harm their retirement security. They fear the stock market may crash their 401(k)s and IRAs, employers may slash their pensions, and budget deficits may put pressure on Medicare and Social Security.

Across party lines workers are worried -- three-fourths  of Americans are concerned economic conditions will affect their ability to achieve a secure retirement. For self-identified Democrats, the level of concern was at 78% compared to 76 % for Republicans. And financial concerns about retirement edge out having enough money for a medical emergency as the top financial worry among workers.

And women’s worries also may have come out in the vote. Women, compared to men, are most at risk of having inadequate retirement income —women have lower pensions and live longer on average. And women have moved away from Republicans as the midterm results confirmed.  Pre-election polls showed that women scored 22 % lower than men when asked if the economy was excellent or good.  This undoubtedly reflects their overall dislike of Trump, but also underscores the continuing worries and weaknesses of this economy even with strong aggregate numbers.

The economy also didn’t help the Republicans because their stewardship is suspect. The tax cut was widely (and correctly) viewed as helping corporations and the wealthy to the detriment of middle-class households.  Republicans discovered this voter reaction early and adjusted their strategy accordingly.  In February, ads from one Republican superPAC mentioned the tax cut over 72 percent of the time; by September, that was down to 17 percent.

Low unemployment numbers may not have helped because current low rates don’t help someone worried about pensions. And though Democrats may attribute low unemployment rates more to Barack Obama’s policies than Trump’s, but a Harris Poll just before the election found that 47 % of respondents credited Trump for the strong economy while only 21 %credited Obama.  But those voters who gave Trump credit for the economy still didn’t vote Republican in big enough numbers.

And that credit to the president didn’t go as far as it might have. Trump’s economic approval rates didn’t follow the usual pattern of approval ratings rising when unemployment rates fall. Based on the past, Trump’s economic approval rating should be about 70%, not just under 50%. Bill Clinton and George Bush had economic approval ratings that peaked at over 70 % when unemployment was slightly higher than Trump's.  And Barack Obama’s economic approval rating was 49%--almost the same as Trump's--when unemployment under Obama was over nine percent.

The Democrats won more than they expected--if not a “blue wave,” then it was at least a “blue tide.”  Democrats won at least 36 House seats, and that number could go as high as 39.  Democrats flipped seven governor seats, including Michigan, Wisconsin, and even historically Republican Kansas, although they failed to capture the Ohio and Florida governorships.  And they lost Senate seats, although not as many as some feared, and they flipped Republican Senate seats in Nevada and Arizona.

The Democratic flip was historic. It is the highest number of House seats Democrats have gained since the post-Watergate election of 1974.  Although both parties showed high turnout, Democrats got around 3.5 million more votes than Republicans, and in thirteen states Democratic votes exceeded their totals for the 2016 presidential election, an almost unheard of pattern for a midterm election.

As an economist, I know that presidents get too much credit and too much blame for the economy. But continuing inequality and worries about health care and retirement are likely undercutting the economic message Trump and the Republican’s message that times are good. So retirement and economic worries may explain the disconnect between Trump’s low approval ratings and the robust economy.  And with an economic downturn more and more likely in the next two years, those ratings could suffer further stress.

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Seniors vote more than anyone (over 70 percent of those age 65 and older vote compared to less than 50 percent of 18 to 29 year olds).  Seniors also are the nation's fastest growing demographic group, with a 75 percent growth rate compared to less than 10 percent for other groups. How government affects elderly voters affects the political life of this country. Older voters are consistent voters, known also as "always voters" because of their consistent turnout.  According to the Pew Charitable Trusts “A 65 percent majority of consistent voters were 50 and older."

So how did these "always voters" vote in the midterm election, and what might that signal for future political outcomes?  For some time, older voters have been among the strongest demographic group supporting Republicans.  But in the midterms, older voters (like all age groups) seemed to shift to the Democrats, though the analysis is not done yet on exit polls so these conclusions could change.

A  Washington Post article reports the swing to Democrats among those over age 65 was smaller than among other age groups and the older voters remain the only group inclined to vote Republican.  In fact, they appear to be the only age group giving a majority of their votes to Republicans, although even older voters came close to 50 percent support for Democrats. The younger the voter, the more Democratic they are.

But the sheer size of the older voter cohort makes them a powerful political force. Writer and Social Security advocate Nancy Altman writes that older voters moving towards the Democrats may make Social Security, Medicare and Medicaid critical issues in the next election.  I would add that retirement policy generally is becoming more and more important, as the consequences of the failed 401 (k) system become more and more apparent.

So now Democrats will control the House, while Republicans retain control of the Senate. How might that affect the framing and actions on retirement policy in the next two years?  Here is what I expect the 116th Congress to do on key policies related to retirement.

Congressman John Larson (D-Conn.), co-chair of the Expand Social Security Caucus, will chair the House Ways and Means Subcommittee on Social Security. He has a comprehensive bill to expand Social Security’s modest benefits and also raise revenue.  We should expect more information on Social Security’s ability to prevent poverty while getting more tax revenue without distorting economic growth.  We also may hear about bolder Social Security finance options including dedicating a restored estate tax to Social Security and raising the earnings cap beyond the 2019 ceiling of $132,900. We also may see House Democratic majority bills aimed at improving Medicare by adding vision, hearing, and dental.

But in our constitutional design, Congress also has an important oversight function in addition to its lawmaking powers.  That role has been neglected during the Trump Administration's first two years, but I expect House Democrats to aggressively play the role that the Constitution envisons, and hold the executive branch responsible for its actions.  For example, the Trump administration has scaled back consumer protections and oversight of nursing homes while reducing their fines for violations.  There may even be some chance of bipartisan progress and agreement, such as that which fellow Forbes contributor Howard Gleckman argues we are seeing in changes to Medicare Advantage plans.

Also watch for hearings on lowering the cost of prescription drugs, with Democratic proposals to have the government aggressively negotiate lower prices.  The Veterans Administration already does this, with up to 50 percent reductions in drug prices for their clients.  With Democrats controlling the House, Trump and Congressional Republicans will need to decide on whether to cooperate on policies such as expanding Social Security and restoring it to long-range actuarial balance; improving Medicare and Medicaid; and lowering prescription drug prices.  Republicans, like Democrats, can count votes, and they see the size and importance of elderly voters.

But I don’t expect  Republicans in the Senate to advocate cutting Social Security and Medicare to reduce projected federal deficits, in spite of their long-standing party opposition to such programs, and Senate Majority Leader Mitch McConnell's hint that they might attack those programs.  Instead, I expect House Democrats to point--correctly--to the Republican tax cuts as the main driver of rising deficits, which could spark more contentious debates.  Even with the desire of both parties to appeal to older voters, it remains to be seen whether cooperation or confrontation dominates the policy debate.

Older Americans may not realize that the Affordable Care Act provides important insurance protections to older Americans still too young for Medicare, especially against denying care for those with pre-existing conditions. Outright federal ACA repeal efforts are probably dead for now, but states and the Trump administration can have tools to continue weaken the ACA (eg the lawsuit pursued by red state attorney generals to declare the ACA unconstitutional.)

Meanwhile red  state voters expanded the ACA’s Medicaid in Idaho, Nebraska and Idaho though all three states voted for President Trump in 2016 -- 500,000 people will gain health insurance.

Rep. Richie Neal (D-MA), likely will become chairman of the powerful House Ways & Means committee. Neal has an interest in retirement policy, and has introduced bills aimed at shoring up retirement savings to cover 63 million American workers with no pensions at work. I am worried incentives to get people covered are very expensive in terms of tax breaks and regulatory red tape. A universal system would be more efficient. Ideas for expanding the failed 401(k) and IRA system include establishing new automatic safe harbor rules, changes to minimum default contributions, matching contributions and a special tax credit. All voluntary and no employer contributions are proposed in the current line up of pension reforms.

Rep. Neal’s bill – the Automatic Retirement Plan Act (ARPA) would require employers above a certain size to have or establish a 401(k) or 403(b) plan that covers all eligible employees, while exempting small employers, governments, churches and businesses not in existence for three years. The bill also allows for open MEPs and increases the start-up credit for small employers.

Neal has acknowledged that his ARPA proposal does include a mandate, but told delegates to this summer’s NAPA DC Fly-In Forum that he believes the parties are amenable to moving in that direction.

Rep. Bobby Scott (D-VA) will likely take over the Education and the Workforce Committee which oversees all matters dealing with workforce-related issues, including labor relations and employment-related health and retirement security matters dealing with ERISA.

We may see the Department of Labor fiduciary rule abandoned by the Trump administration and Republican Congress to be advanced by Rep. Maxine Waters.

Other proposals for affecting more than 10 million U.S. workers and retirees covered by 1,400 multiemployer pension plans is expected.

Divided governments require compromise to get anything done and both parties want the support of older voters. Therefore, we may see some momentum on retirement policy that will help seniors: could restoring the fidicuary rule, improving nursing home regulation, and lowering drug prices not be bipartisan places to start?

From the Census Department on Voters:

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The politics leading up to the midterms are stranger and stranger. Not only is President Trump arguing with leading Republican Paul Ryan, about the Constitution, but the highest-ranking Republican in the Senate – Senator Mitch McConnell -- has called for cuts to Social Security. That is strange politics because Social Security is the most popular program in America, especially among the voters who are growing the fastest and who vote the most – people over 65.

A poll one week before the election about Republican social and economic policy is a red flag for Republicans. 60% of Americans would prefer to reverse the Republican 2017 tax cuts than cut spending on Social Security, Medicare and Medicaid. This poll was taken a week after Senator McConnell said the Republicans would defend the tax cuts and cut Social Security, Medicare and Medicaid in order to curb the growing deficit, caused in significant part by those very tax cuts.

The Republican Party has always been associated with opposition to Social Security. Economic historian Max Skidmore shows that the final vote for Social Security was lopsided--only 2% of Democrats voted against it (because it wasn't generous enough) while 33% of Republicans voted against Social Security.

Historian Arthur Schlesinger (page 311) notes that the Republicans echoed corporate opposition to Social Security. A representative of the Illinois manufacturers testified that if Social Security was passed it would undermine America by “destroying initiative, discouraging thrift, and stifling individual responsibility.” In 1935, Republican congressman John Taber said Social Security “is designed to prevent business recovery, to enslave workers, and to prevent any possibility of the employers providing work for the people.”

In the 1970s the conservative Cato Institute made shrinking Social Security through privatization its primary objective and in 2005 George W. Bush tried to replace Social Security with private investment accounts. The Bush privatization plan failed. Though Republicans supported it, no Democrat in Congress would agree and the balance was such the Republicans had to convince at least one Senator to switch sides.

When Medicare was first being considered Senate Republican Robert Dole (then in the House) voted against it. Also in opposition to Medicare, in a famous 1964 speech, Ronald Reagan explained that his opposition to Social Security and Medicare is why he switched from the Democratic Party to the Republican Party. He called Social Security “welfare” and said of the possible regret in not stopping the passage of Medicare: “One of these days you and I are going to spend our sunset years telling our children and our children’s children what it once was like in America when men were free.”

When Vice President Mike Pence was in Congress he opposed passage of Medicare's Part D, the drug benefit, and complained that Bush's proposal to partially privatize Social Security was not enough; Pence proposed deeper cuts to the Social Security program than President Bush.

It seems Senator McConnell, usually careful not to rock the boat before the upcoming midterm elections, did not set out to tell the electorate that Social Security, Medicare and Medicaid cuts were high on the Republican agenda. It appeared to be a slip as he was caught off guard defending the Republican tax cut against a mid-October U.S. Department of the Treasury report attributing the highest deficit in six years to the Republican 2017 “Tax Cuts and Jobs Act.”

Just to be clear, the Republican tax cuts of 2017 are driving the deficit.  Spending more than revenue causes a deficit. But Social Security is required by law to pay benefits only from its revenue and trust funds.  Social Security is one of the few government programs with built-in fiscal discipline.

Bottom Line: Though Senator McConnell may not have meant to publicize the Republican agenda to cut Social Security, Medicare and Medicaid, the long history of Republican opposition may be an example of what Sigmund Freud and modern psychologists believe--a slip of the tongue may reveal more of the truth than a well-constructed prepared remark.  And in order to defend their expensive and regressive tax cut, Republicans may be preparing to cut America's most popular programs.