Income-tax deductions are worth the most to high-bracket taxpayers, who need little incentive to save, whereas the lowest-paid third of workers, whose tax burden consists primarily of the Social Security payroll tax (and who have no income-tax liability), receive no subsidy at all. Federal tax subsidies for retirement saving exceed $120 billion a year, but two thirds of that money benefits the most affluent 20% of Americans.
Despite all that, the 401(k) is called, by some, "the envy of the world" (Calabrese & MacGuineas, 2003). Traditional and 401(k) pension plans have, between them, nearly $7 trillion in assets, and account for the "vast majority of financial assets accumulated by households in recent years (Calabrese & MacGuineas, 2003). The authors say that the system works well because it offers powerful incentives, tax breaks and employer matching contributions -- to encourage individuals to contribute to the plans. Other reasons include convenience and discipline of the automatic payroll deductions, as well as hefty penalties for withdrawing the funds early (Calabrese & MacGuineas, 2003).
This situation presents two very different sorts of sociological considerations. First, the high frequency of job change in the United States makes portability of these funds essential. Second, despite their utility, compared to the rest of the globe's government-funded retirement plans, Social Security benefits are very modest, forcing more workers to rely on something in addition to Social Security, or risk a devastating old age (Turner, 2003).
In 2002, Johnston wrote that more than 42 million Americans, or "one in three with a job," have a 401(k) to defer part of their income for their old age. Moreover:
Survey after survey shows that Americans love their 401(k) plans and, except for the oldest workers, value them more highly than traditional defined-benefit pensions, which pay a lifetime annuity, are largely guaranteed by the federal government, and have been in decline since the 401(k) began two decades ago (Johnston, 2002).
The reasons for this mirror U.S. society, which, as noted above, includes frequent job changes. Traditional pensions pay off only for those who stay with one company for an entire career; those who change jobs and have defined benefit plans find that their benefits are "frozen in the dollars of the year (they) quit, their value eroded by inflation" (Johnston, 2002).
And there are other Trojan horses implicit in retirement funding, American style. On the seemingly positive side, because 401(k)s come with regular statements, holders know how much they have. Moreover, the funds can go along with the employee to the next job, or the funds can be rolled over into an Individual Retirement Account (IRA). There is also a psychological component; because "So few Americans have ever had financial assets...getting a monthly statement showing shares of mutual funds can make one feel prosperous" Johnston, 2002). This tends to make workers think they are capitalists "until their jobs disappear and they have to cash in their mutual funds, paying a 10-percent tax penalty, just to feed the kids and keep a roof over their heads" (Johnston, 2002).
In addition, between 2000 and 2002, 401(k) funds plummeted 25%; those who have suffered the losses are wondering if the 401(k) hasn't been sold as a miracle cure when, in fact, it is much like any other investment based on stocks and bonds; it can go up, and it can go down.
Johnson notes that "The success of 401(k) plans is a triumph of marketing over sound policy, for despite their portability they are inadequate to the task set for them: to provide reliable income in retirement" (2002). Johnston blames this on high fees, biting into principal, as well as risk form "kleptomaniac bosses." In addition, usually "they are so heavily invested in employer stock -- as in Enron and Global Crossing -- as to make them a gross violation of the three basics of investing: diversify, diversify, and diversify" (Johnston, 2002).
Many Americans have never heard that advice, and, in any case, many wouldn't heed it if they could. A book called the Great 401(k) Hoax by William Wolman and Anne Colamosca makes this clear. Johnston, in light of it, notes that "the portrait it paints of the investment skills of most Americans raises serious doubts about the Bush administration's proposal to allow workers to invest two percentage points of their Social Security taxes on Wall Street" (2002). One could add to that, especially in light of the plans to reduce and delay Social Security payments for that same population.
During the 1980s and 1990s, Wolman and Colamosca say there was not simply good marketing in place to move the concept of the 401(k) into the American vocabulary; there was also a conspiracy to relieve companies of the burden of providing pensions for loyal, long-time employees. They conclude that "The 401(k) typically costs businesses much less than traditional pension plans, and, not surprisingly, leaves many workers much worse off than they would be under the old system, even with several job changes during their careers" (Johnston, 2002).
It is not surprising, therefore, that the wealthiest ten percent of Americans still own 85% of all stocks, despite the huge numbers of shares in 401(k)s. Johnston (2002) notes:
At the end of 1998, half of all 401(k) accounts held less than $16,000. The average balance for people in their sixties was $117,300 -- hardly enough to get an elderly couple through five years of retirement, much less 20 or 30 years (Johnston, 2002).
To begin to see that 401(k)s are not a retirement panacea it is only necessary to know that few workers earn enough to save much for at least the first two decades of their work life. In addition, many also dip into what they have saved when changing jobs (Johnston, 2002), a practice that would seem to be bound to become more widespread as more and more companies refuse to pay relocation costs, especially for less than high management, ironically, those who can least afford a move but often must in order to have a job at all in a changing economy.
Johnston (2002) notes:
The authors (Wolman and Colamosca) go on to show convincingly that no matter how you slice the numbers, the 401(k) is not up to the task of providing a secure retirement income, especially in a world in which half of all women who turn 50 this year are expected to live into their nineties. One key problem with 401(k) plans, as opposed to pensions, is that one must make sure to save enough extra money so the funds do not run out before life does. That requires a large cushion for each individual, larger than in the kind of efficient risk-spreading pool that is a pension fund.
In other words, what 401(k)s do, by shifting all the retirement risk to the individual, is make sure that individual must -- if he or she even has the extra income to do so -- choose between having a slightly better life now and bet on his or her own longevity, or live better now and bet that his or her life will not extend too many years beyond retirement. Such a Hobson's choice seems a cruel way to handle increasing longevity in an affluent society.
But it offered business the advantage of shifting their burden, as noted earlier. The 401(k) was initially promoted as a supplement to regular pensions, or as a way for smaller employers to help employees it could otherwise not help at all.
In addition to letting the employer off the hook, it also deprives the retiree of protection via the federal pension guarantees that apply to bona fide employer-run pension accounts.
In a pension, funds are set aside in an investment pool to finance benefits, the amount of which are usually calculated based on years on the job multiplied by a percentage of salary in the last five years of the employee's work life. "With a 401(k), the worker typically defers money from his or her paycheck and the company matches a portion of it, most often 25 cents on each dollar saved up to a very low limit, often $1,000 or less for the match." In other words, the 401(k) lets the employer avoid managing funds for its employees' retirement, and the government is also off the hook for guaranteeing what the employer has done; the worker is left to find for himself.
In addition, of course, the stingy $1,000 match is not going to help the employee very much. And lately, with the performance of the stock market after 2000, Johnston calculates that even if stocks rise an average of 1.9% above inflation annually, the $1,000 saved today will be worth only $1,457 twenty years from now. A more realistic perspective, however, shows just how paltry these numbers are. If an individual saved $10,000 annually from age…