They’re no substitute for real pensions but remember Voltaire
By Gerald E. Scorse, Progressive Charlestown guest columnist
Retirement experts have been
beating up on the accounts ever since. Two fresh examples aim specifically at
401(k)s, easily the most
common of
the type.
One was an in-depth article asking
a serious question, “Was the 401(k) a Mistake?” The
answer, equally serious, was an emphatic “yes”. By coincidence, the second
critique also asked a serious question and delivered a “yes” answer: “Should Your 401(k) Be Eliminated
to Save Social Security Benefits?”
The
primary fault of 401(k)s and all comparable accounts—undeniable fifty years ago
and undeniable today—is that they simply can’t compare to pensions. Employers
put up the money for pensions, investing it on behalf of their workers. The
workers collect when they retire, getting fixed monthly amounts (and often
cost-of-living increases as well) for the rest of their lives.
At
some point those workers will also be drawing Social Security, so they’ll be
savoring financial double-dips for all of their later years.
Retirement
plans are almost the exact opposite of pensions. Workers put up their own money
(though employers, especially in more recent years, have kicked in something as
well). There are no guaranteed monthly returns down the road. There’s
actually no guaranteed anything: the value of the accounts goes up one day and
down the next, and where it ends nobody knows.
No
wonder, then, that retirement experts have never been fans of IRAs, 401(k)s and
the like. And yet, and yet: maybe the picture isn’t quite as bleak as it’s long
been painted.
Maybe the bill that President Ford signed 50 years ago deserves to be called “the most important piece of retirement legislation” in American history.
Just
for a change, let’s look at the bright side (and maybe the right side?) of
retirement accounts. How they perform will hugely impact the coming decades for
tens of millions of workers—and their spouses, children and grandchildren as
well.
To
begin at the beginning, President Ford and Congress had their heads and their
hearts in the right place when they first created retirement accounts. It’s
true that what they created would never provide the security of pensions—but most
workers didn’t
have pensions, and never would have.
Retirement
accounts, though, gave them a vehicle they never had before: an easy way to
invest, an easy way to create their own personal supplement to Social Security.
The
accounts also came with a tax break that pensions never offered to workers.
Account holders pay no taxes on any of the money they put into the accounts, or
on any of the gains, until they begin withdrawals. The timetable for
withdrawals would later get bonus tax breaks as well. The starting age has
always been 59 ½, but the age for mandatory withdrawals has been pushed back
twice. It’s now 73, headed toward 75 in 2033.
(Roth
accounts are an outlier: contributions are taxed, but withdrawals are tax-free
and there’s no mandatory withdrawal during the owner’s lifetime.)
From
a modest beginning, retirement tax breaks have grown to become the biggest tax
favor of all. According to the Joint Committee on Taxation, they’ll cost $251.4 billion in fiscal year 2024.
That’s $251.4 billion that doesn’t go to the Treasury, that stays instead in
the pockets of taxpayers. Admittedly, those breaks heavily favor America’s
high-, higher- and highest-income workers. (So do pensions, government and
private industry alike.)
The
fate of retirement accounts is directly linked to the stock market, and the
link could hardly have been more rewarding. Of course there are bad times; as
recently as 2022, all the major indexes suffered huge losses.
But
the market has always come back. This May 17th, for the first time in its
139-year history, the Dow Jones Industrial Average topped 40,000. There’s a
pass-along plus too; unlike pensions, retirement accounts can be left to any
generation.
Wall
Street’s performance underlines a notable about-face by Alicia H. Munnell, a
prominent retirement expert. Ms. Munnell heads the Center for Retirement
Research at Boston College. She once believed that pensions outperformed
401(k)s—until the Center’s own research proved otherwise.
Asset
accumulation, though, is just one measure of retirement plans. Ms. Munnell
remains a critic: she co-authored the paper, mentioned earlier, that proposes
scrapping 401(k)s to save Social Security.
For
the final words on America’s 50-year-old retirement plans, let’s go back
roughly 250 years to the French philosopher Voltaire. To paraphrase, never let the
perfect (pensions) be the enemy of the good (IRAs and all their brethren).
© 2024 Gerald E. Scorse
This
piece first appeared in the New York Daily News.
