Thursday, March 26, 2009

Debating the 401k

From the "Room for Debate" feature on the NY Times website:

So Much for the 401(k). Now What?

Below are a few outtakes from the various contributors:

* Alicia H. Munnell, Center for Retirement Research
* Jacob F. Kirkegaard, research fellow, Peterson Institute
* Thomas R. Saving, economist, Texas A & M
* Teresa Ghilarducci, economist, The New School
* David C. John, senior fellow, Heritage Foundation
* Thomas C. Scott, money manager

When 401(k) plans came on the scene in the early 1980s, they were viewed mainly as supplements to employer-funded pension and profit-sharing plans. Since 401(k) participants were presumed to have their basic retirement income security needs covered by an employer-funded plan and Social Security, they were given substantial discretion over 401(k) choices.

Approximately 60 million Americans today have a 401 (k) plan, or just over 40 percent of the non-farm work force. In other words, more than half the United States work force does not have a 401(k) plan and thus derive no benefits from the associated tax break.

Yet tax-breaks cost our government a lot of money. The latest data shows that 401(k) plans in 2007 alone resulted in lost federal tax revenue of $46 billion.

There is no doubt that the world is risky and rare events happen. But what is the alternative? Assuming that the current value of equities represents the future earnings of the underlying corporations, then unless you believe that something fundamental has changed so that the long-term future of the economic system is one of stagnation, you should continue to invest in your 401(k) and maintain an age-adjusted equity share.

The 401(k) is a failed experiment of how well individuals can save for their retirement in commercial individual accounts. Instead, we need a supplement to Social Security that competes with the 401(k) — what I like to call a “guaranteed retirement account” plan to which all workers and employers would contribute 2.5 percent.

The sad fact is that any form of retirement plan causes risk to someone. Traditional pensions put the risk on the company; government-managed systems put it on the taxpayer, who already must pay for Social Security and Medicare excess costs. What is needed is a way to reduce risk on the individual 401(k) investor.

How do you feel about 401k's as a retirement savings tool?


Adrienne said...

Since I have about 30+ years to go until retirement and, thus NEVER expected to see any dinero from Social Security...I have planned accordingly with mine. And, as the song says, I feel fine.

TeacHer said...

One of the great things about being a teacher in many states it that we stil get traditional pensions. But even this isn't going to be enough money to retire comfortably, and I don't feel that it's entirely secure. There's no rule that says public schools have to keep offering pensions, so this is a benefit that could go away. And all pension plans are not created equal. The Pennsylvania state teacher's pension is much better than the Maryland state teacher's pension and the New York state teacher's pension trumps pretty much everyone's.

So I guess the answer is, I'm not sure who should be responsible. Does anyone know how retirement is handled in other countries?

movingeast said...

In Australia, "Superannuation" is the equivalent of a 401k.

Anyone who is employed must receive at least a 9% contribution from their employer on top of their salary into Superannuation. Many companies contribute more (eg 15%). You can also put in up to 50k a year in pre-tax contributions... There are larger amounts if you are older.

You can also keep it with a fund manager or maintain your own super fund (a lot of baby boomers do that over there). You can put property into the fund as well.

At the time of withdrawal, there is some tax levied, but much reduced from usual tax rates. There are large tax penalties if you take out a lump sum though.

On top of this is a universal means-tested pension that is available as a minimum income for retirees. If you have a lot of money in Superannuation, you won't get that.

I'm an Aussie working in the US, so it is interesting to see the difference in the two systems.

Adam @ Checkbook Diaries said...

My company matches the first 6% of my base salary with $0.75 on each dollar I contribute. That right there is incentive enough for me to continue to contribute AT LEAST the maximum that they will match.

Escape Brooklyn said...

I want to move to Australia!

Anonymous said...

I have always had 401ks since I've been working, and if it wasn't for them, I'd be screwed. I'm happy for 401k programs where I can control how much $$ I'm contributing and get a match from my company. My company does still have pensions (for now), but when the day comes and I retire, my pension will be an added bonus if it still exists.

It is sad that a lot of people don't contribute. They are uniformed and out of luck.

Thrifty Gal said...

You pooh-poohed 401Ks because lots of people lost money in them. The solution is to choose the non-risky investment choices. I have been told by investment advisors that I am too risk averse; about 80% of my 401K money is in the "fixed fund" option. Obviously that part has not gone south in this bad economy. Also, keep in mind that many, many companies are dropping traditional pensions and offer 401Ks only; thus they are very necessary. Yes, the fact that they are funded with pretax income means the nation as a hole supports them. However, without them, how much will the nation (i.e. taxpayers) pay for 70 million baby boomers to be on public assistance in 20 years?

Anonymous said...

It did not COST the government 46 billion, there was 46 billion in potential revenue that the government did not collect because of the program.

Anonymous said...

On a societal level - Good as a supplement to a defined benefit plan and social security, but not "THE" solution.

On an individual level, maximize it.

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