Perhaps because of the full moon last week, the 401(k) “enemies” were out in force.
Yes, last week we were treated to a Bloomberg Opinion Article with ideas on how to “fix” America’s broken retirement savings system, a backhanded compliment (sort of) on SECURE 2.0 in Forbes by Teresa Ghilarducci, and the trifecta was completed by an academic editorial in the Washington Post alleging that the current pension system is “built for the rich”.
Much of the criticism was of the same old myopic view of taxes and tax preferences, all seasoned through the prism of a very skewed preference for federal government involvement in these matters, rather than the private sector.
So, allow me to take a few minutes to highlight a few points that always seem to be overlooked:
1. Tax deferral is not tax avoidance. These dues and earnings will be taxed (although generally outside of the 10-year budget scoring window used by Congress).
2. The ability to save for retirement on a pre-tax basis is a powerful incentive – even, and perhaps especially, for those who, according to academics, have no rational reason to do so (because, on a net, they do not have to pay federal income tax).
3. Tax benefits encourage not only plan participation (even if this is the case), but also the creation/existence of pension plans, in which low-income workers are 12-15 times more likely to save only alone.
4. Non-discrimination tests and legal contributions limit work (as intended) to maintain an effective balance between the benefits of the highest-paid workers and those of the others. In fact, real data proves that even though higher income earners have higher account balances, those balances are roughly proportional to their income. They are not “upside down”.
Now, with those things in mind (we’ll get to them later), what did the “enemies” have to say?
Well, the Bloomberg editors’ “fix” to the system they claim is “broken” involves: (1) making access universal (but wait, what about Social Security?) – with a 3% self-default rate with an opt-out (they cite the UK NEST opt-out rate of 8%, although the opt-out rate for comparable state-run IRA schemes in the United States is three to five times higher); (2) making it “simple” (the federal government’s Thrift Savings Plan, or TSP, has been cited), ostensibly with an abbreviated fund menu – or perhaps simply because it’s a government solution; (3) make it “portable” (actually they want it centralized, presumably with the feds, so it never has to be moved/knocked down), and (4) they want it to be ” progressive,” which essentially means shifting the current tax deferral to a direct government match with “the lowest earners.”
There’s really nothing new here – the solution seems to be, more or less, a “nationalisation” of retirement savings – with a program focused on helping those at the bottom of the income scale, but completely ignoring the vast sea of middle-income savers — for whom Social Security alone is unlikely to be enough to reproduce their retirement income needs.
the Washington Post The editorial was written by Daniel Hemel, professor at the University of Chicago Law School and visiting professor at New York University School of Law. He seems quite angry with bipartisan support for SECURE 2.0 (actually the Securing a Strong Retirement Act of 2022) as some kind of Congressional sellout of the financial services industry. He owns a problem with “mega-IRAs”, but it also targets Roth contributions, the extension of the minimum required distribution period, the tax non-refundability of savings credit, as well as the gradual increase in catch-up limits – all of this which are characterized either as a gift to the rich, or as a budgetary “trick”, or both. He offers no solution to any of this, although he does suggest that focusing on stronger social security would be a better use of their time (I for one would support that). Nor is it acknowledged that somewhere along the way this system “built for the rich” managed to end up with about two-thirds of its participants in tax brackets which, by most measures , would fall well below what this label would encompass. Groups for whom this “broken” system is a lifeline beyond the baseline of Social Security and retirement benefits they never had.
And then, just before this article, Teresa Ghilarducci, a familiar critic of 401(k)s, writes an article ostensibly focused on the provisions of SECURE 2.0 (even taking the time to try to explain why he garnered such bipartisan support) on his way of pointing out why his proposal (now called the Ghilarducci/Hassett/EIG retirement proposal) is superior. Now most of us would think that the legislation – any legislation – that passed the United States House of Representatives by a margin of 414 to 5 should be about something as innocuous as naming an office position – that it would advance so many aspects of retirement security rather speaks to the importance of the problem(s) and the possibility of making progress in resolving them.
Well Ms. Ghilarducci seems to think that while SECURE 2.0 might be better than punching the eye with a sharp stick (my words, not hers), but she claims the patches it provides are too small (and probably too late), compared to her solution (if bipartisanship in the US Congress is quickly removed, she is very proud of her alignment with conservative economist Dr Hassett) that would build a TSP-like program for – well , everyone – or at least those who don’t. Don’t already have a retirement savings plan at work. This particular article doesn’t go into the details of its solution, but we’ve seen (and written about) it before. Notice that she’s not really worried about what you and I might consider middle-income workers — she’s focused on the low end (under $52,000 median household income). He asks for a counterpart from the government (rather than from the employer), but which is only 3%. Now, that’s a number that’s come up in previous proposals that she’s put forward – and Jack VanDerhei, when he was at the Employee Benefits Research Institute, predicted that to be well in below where the status quo brings that same group into the current system.
Now, those of us who actually work with real people know that this supposedly “broken” system works incredibly well – for those who have access to it – including, especially, those at the bottom of the income scale. Academics consistently target the well-to-do in their criticisms, but ignore the needs of middle-income households for whom Social Security will almost certainly not be…enough. And completely ignore/ignore the role that current tax benefits play in promoting the formation and maintenance of these pension plans.
Indeed, beneath all the criticism, the real problem seems to be that, as we have repeatedly noted, too few American workers have access to this system. What these critics don’t seem to appreciate is that, rather than bridging this gap by further encouraging plan formation and participation, these haphazard editorials – often based on myopic opinions and faulty premises – only serve to to undermine this objective. But then, there might be a reason…
There are many success stories out there – I bet each of our 35,000+ readers knows one, ten, a dozen, maybe hundreds… it’s high time we started telling them.
 Bizarrely, they suggest that people should be able to “dip into their accounts for occasional emergency expenses”, which they say would “save billions more that would otherwise go towards interest on loans on often predatory wages”.
 I think, like previous proposals, its calculations work because it assumes that any balance not actually withdrawn by the individual (and possibly their spouse) would be absorbed into the “pool” and used to fund other payments .