NY Times: Was The 401(k) A Mistake?

New York Times Magazine, Was the 401(k) a Mistake?:

How an obscure, 45-year-old tax change transformed retirement and left so many Americans out in the cold.

With pensions, otherwise known as defined-benefit plans, your employer invests on your behalf, and you are promised a fixed monthly income upon retirement. With 401(k)s, which are named after a section of the tax code, you choose from investment options that your company gives you, and there is no guarantee of what you will get back, only limits on what you can put in. This is why they are known as defined-contribution plans. Pensions still exist but mainly for unionized jobs. In the private sector, they have largely been replaced by 401(k)s, which came along in the early 1980s. Generally, contributions to 401(k)s are pretax dollars — you pay income tax when you withdraw the money — and these savings vehicles have been a bonanza for a lot of Americans.

Not all companies offer 401(k)s, however, and millions of private-sector employees lack access to workplace retirement plans. Availability is just one problem; contributing is another. Many people who have 401(k)s put little if any money into their accounts. With Americans now aging out of the work force in record numbers — according to the Alliance for Lifetime Income, a nonprofit founded by a group of financial-services companies, 4.1 million people will turn 65 this year, part of what the AARP and others have called the “silver tsunami” — the holes in the retirement system are becoming starkly apparent. U.S. Census Bureau data indicates that in 2017 49 percent of Americans ages 55 to 66 had “no personal retirement savings.” 

The savings shortfall is no surprise to Teresa Ghilarducci, an economist at the New School in New York. She has long predicted that the shift to 401(k)s would leave vast numbers of Americans without enough money to retire on, reducing many of them to poverty or forcing them to continue working into their late 60s and beyond. That so many people still do not have 401(k)s or find themselves, like Jen Forbus, in such tenuous circumstances when they do, is proof that what she refers to as this “40-year experiment with do-it-yourself pensions” has been “an utter failure.”

It certainly appears to be failing a large segment of the working population, and while Ghilarducci has been making that case for years, more and more people are now coming around to her view. Her latest book, “Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy,” which was published in March, is drawing a lot of attention: She has been interviewed on NPR and C-SPAN and has testified on Capitol Hill.

It is no longer just fellow progressives who are receptive to her message. Ghilarducci used to be an object of scorn on the right, once drawing the megaphonic wrath of Rush Limbaugh. Today, though, even some conservatives admit that her assessment of the retirement system is basically correct. Indeed, Kevin Hassett, who was a senior economic adviser to President Trump, teamed up with Ghilarducci not long ago to devise a plan that would help low- and middle-income Americans save more for retirement. Their proposal is the basis for legislation currently before Congress.

And Ghilarducci recently found her critique being echoed by one of the most powerful figures on Wall Street. In his annual letter to investors, Larry Fink, the chairman and chief executive of BlackRock, one of the world’s largest asset-management companies, wrote that the United States was facing a retirement crisis due in no small part to self-directed retirement financing. Fink said that for most Americans, replacing defined-benefit plans with defined-contribution plans had been “a shift from financial certainty to financial uncertainty” and suggested that it was time to abandon the “you’re on your own” approach.

While that isn’t likely to happen anytime soon, it seems fair to ask whether the country as a whole has been well served by the 401(k) revolution. The main beneficiaries have been higher-income workers; instead of making an economically secure retirement possible for more people, 401(k)s have arguably become another driver of the inequality that is a defining feature of American life. ...

A few years ago, Kevin Hassett, who was chairman of the White House’s Council of Economic Advisers for a portion of Donald Trump’s presidency, became familiar with Ghilarducci’s work and sent her, unsolicited, the draft of a paper he was writing about the retirement-savings gap. She replied enthusiastically, and he suggested that she write the paper with him. Their partnership eventually yielded a plan for helping lower- and middle-income Americans save for retirement.

The idea they hatched was to make the Thrift Savings Plan, a government-sponsored retirement program for federal employees and members of the uniformed services, open to all Americans. T.S.P., which in total assets is the largest defined-contribution program in the country, includes automatic enrollment and matching contributions from the government. A number of states now offer retirement-savings plans for people whose employers don’t provide 401(k)s, but none of these include matching contributions, which many experts believe are an important incentive for getting workers to set aside a portion of their own salaries.

Ghilarducci and Hassett think that only a federal program in which savings accounts of eligible workers are topped up with government money will significantly increase the participation and savings rates of low-income Americans. Their proposal is the basis for the Retirement Savings for Americans Act, a bill recently introduced by the U.S. senators John Hickenlooper and Thom Tillis and the U.S. representatives Terri Sewell and Lloyd Smucker. Two are Democrats; two are Republicans.

This past January, another bipartisan collaboration — between Alicia Munnell, who was an economist in the Clinton administration and who now serves as the director of Boston College’s Center for Retirement Research, and Andrew Biggs, a senior fellow at the American Enterprise Institute, a conservative think tank — published a paper calling for a reduction or an end to the 401(k) tax benefit.

Their research showed that it had not led to more participation in the program nor had it significantly increased the amount that Americans in the aggregate were saving for retirement. It was mostly just a giveaway to upper-income investors and a costly one at that. They estimated that it deprived the Treasury of almost $200 billion in revenue annually. They proposed reducing or even ending the tax-deferred status of 401(k)s and using the added revenue to shore up Social Security.