Here's another solution looking for a problem. Teresa Ghilarducci, an economics professor, has managed to get some traction for her new retirement savings concept that would call for doing away with the tax benefits of 401(k) plans. Her book, "Now We're 64" has been touted by various shows on National Public Radio. As if that weren't enough, the New York Times published her op-ed piece on the subject. Now, it's been reported that Congressmen are taking the concept seriously.
Ouch! This new proposal removes all the tax benefits of 401(k) plans and gives everyone a $600 tax credit for contributing to a government-operated account that would invest in stocks and bonds. The government, however, would guarantee that the account would grow at a rate equal to three percent above the rate of inflation. The funding for the tax credit (and guarantee) would come from all the additional taxes that the government would collect now that 401(k) plans would no longer enjoy any tax benefit.
The argument that this is a better mousetrap begins by establishing the fact that 401(k) plans have failed miserably. Ms. Ghilarducci contends that the 401(k) phenomenon sounded the death knell for those defined benefit pension plans that have become the dinosaurs of the retirement plan industry. If employers had offered every one of the 78 million American employees a defined benefit plan, we wouldn't be in this mess today. Everyone would have plenty of money to support their eccentric personal lifestyles in retirement, and nobody would be claiming that social security and their savings would fall short of expectations.
The reality is that since the first 401(k) plans were introduced thirty years ago, this accidental success story of legislative history has created roughly five times more retirement plan value than would have been the case for the average American participating in defined benefit plans over the same period. The reason is simple. The average employee changes jobs every seven years and never would have stayed in one place long enough to generate any material benefit from a defined benefit plan.
Meanwhile, seventy-five percent of all workers in the private sector work for companies with less than 100 employees --- small companies for whom a defined benefit pension obligation becomes a loose cannon on the deck. Given today's economic climate, it's clear that defined benefit promises are unsustainable even for large companies. Anytime the word "guarantee" enters the realm of retirement planning, as it does in Ms. Ghilarducci's concept, we have thrown fiscal restraint and rational thinking out the window. How about those early '80's years when inflation was running at 18 percent. We taxpayers will want to write checks to guarantee a 21 percent annual return? Please.
The primary purpose of 401(k)'s was to create, as President Reagan put it, "portable pension plans." The result has been a stunning success. Fifty million Americans have accumulated over 2 trillion dollars in these plans. Most participants will confess that it is the only savings and investment plan that has ever worked for them. These contributions average about 6 percent of pay. When the bottom of the current market finally reveals itself, we can thank our army of experienced 401(k) investors for staying the course, remaining largely committed to equities, and dollar-cost averaging from paycheck to paycheck. Less than five percent have panicked and moved to cash this year. We have created a nation of Warren Buffets --- patient long-term investors lapping up stocks (and even bonds) at today's ridiculously low prices.
Sure, the average 401(k) account balance, as Ms. Ghilarducci points out, is "$42,000 per worker" but this figure is skewed by brand new participants with a few thousand dollars. Then we read, "the average 401(k) investor has 40% invested in their own company's stock." Huh? The vast majority of us don't even work for public companies. Meanwhile, these "averages" do NOT include IRA balances that were generated in successive 401(k) plans and then rolled over into what, for professor Ghilarducci's calculations, is some sort of black hole. Instead of being expunged from the records, these rollovers add at least a second 2 trillion to the 401(k) accomplishment --- soon to be far more.
Trust me. The average retiree in their late sixties today has something approaching at least a low-to-mid-six-figure retirement account balance, and the more prudent, while earning just modest incomes, have become the "millionaires next door." These voluntary retirement accounts have succeeded for most people where conventional retirement plans generated next to nothing for the average worker. Has the government somehow lost out? Not really. It gets to eventually tax retirement money as regular income versus what otherwise might have been capital gains on a much smaller amount. Any effort to dismantle one of the most solid underpinnings of today's shaken economy would be hopelessly misguided.