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February 07, 2013 10:04 AM 401-Nay

By Ed Kilgore

In yesterday’s Lunch Buffet, I briefly noted Duncan Black’s (better known as Eschaton’s Atrios) op-ed in USAToday calling for a major increase in Social Security benefits to offset the “disaster” of the “401(k) experiment” which has left many millions of baby boomers facing retirement without the employer-based retirement resources that are supposed to represent one of the three legs of the “stool” of retirement security in this country (the other two being Social Security and personal savings).

Politically, at a time when there is enormous pressure to reduce Social Security benefits, Black’s call for a big and immediate boost isn’t likely to be taken up seriously in Congress.

But there are some smaller measures that could help, argues Anne Kim of the Corporation for Enterprise Development, in a web-exclusive article for the Washington Monthly. She shares Black’s fears about the inadequancy of 401(k)’s, partly because so many people have been forced to dip into them, despite heavy tax penalties, during the Great Recession:

According to HelloWallet’s report, Americans are withdrawing more than $70 billion a year from their retirement savings—and often paying big penalties to do so. On top of regular income taxes, early withdrawals are subject to a 10 percent additional tax penalty, which depending on the bracket, could eat up nearly half of a person’s withdrawal.
For many people, employer-sponsored retirement plans are the only mechanism “forcing” them to save. Yet the retirement-only focus of the current system isn’t versatile enough to meet people’s real needs—especially to cope with emergencies such as a job loss or a horrifically expensive car repair.
The depth and breadth of this ”leakage” from Americans’ retirement accounts means it’s time to rethink the kinds of savings accounts that all Americans should own. In particular, new ways to encourage emergency savings could help ensure that 401(k)s don’t continue to be an expensive, last-resort piggybank for so many Americans.

Part of the problem, says Kim, is that 401(k)’s have been subject to the same kinds of predatory financial practices as mortgages and credit cards, and need to be aggressively policed by the new Consumer Financial Protection Bureau, assuming congressional Republicans don’t succeed in smothering the infant agency in its crib.

But new means for emergency savings are needed as well. Kim mentions employer-linked emergency savings programs separate from 401(k)’s; broader access to disability and accident insurance; and a refundable “Saver’s Credit” that would be made available to low-income families who might otherwise never be able to save.

Whatever means are adopted, it’s past time for policymakers to stop thinking of 401(k)’s as a successful replacement for the defined-benefit pensions that are slowly beginning to fade from the scene just as baby boomers begin to retire in vast numbers. Before long, we are going to see a new crisis in old-age poverty, even as conservatives continue to claim we just can’t afford to do a thing about it.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • David Martin on February 07, 2013 10:34 AM:

    Florida's considering getting rid of defined-benefit pensions, leaving employees dependent on 401(k).
    http://www.wuft.org/news/2013/01/25/pension-reform/

  • c u n d gulag on February 07, 2013 10:46 AM:

    401K's, when they were first proposed, were never supposed to replace pensions (or company stock plans) - they were meant as another way for employees to save for retirement.

    But, what happened was brilliant!
    And evil and stupid at the same time.

    They quickly became go-to employee savings vehicle for companies, which didn't want to save to pay pensions, and at the same, pay out percentages into 401K's.

    So, 401k's - if they were even available - became the primary means for employees to save - especially as companies didn't raise salaries so people could save on their own, but instead said, "Look, instead of X as a salary, why don't you take less, and we'll contribute some part of the difference into your retirement via our 'generous' 401K plan!"

    And, so, those still remaining pensions for existing workers were set aside, left to be raided at a later time (see Hostess, last year).

    401K's, also made employees mini-stock brokers, and following the markets, to see how their savings were doing. And so, they tied people to Wall Street in ways they never felt tied before, when some actuaries and investors were handling their pensions, and sening out annual reports.

    But 401K's, unlike guaranteed pension plans, which were spread out in a far larger array of investments, minimizing downturns, were subect not only to positive market forces - I saw mine go from $0 to almost $40,000 in in less than 5 years - but also subject to negative forces - I lost a good chunk of that in a couple of weeks in 2008.

    And then, when I had to move, and pay off debts because I couldn't find a job, I had to cash them out early - paying heavy, heavy penalties.

    And so, here I sit, no job (and no prospects for any), no 401K, and people in the Federal goverment looking to raise age eligibility and cut benefits for people like me - 55 year-olds who can't find a job, and have no savings left.

    As Yakoff Smirnoff used to say;
    "America! VAT A GREAT COUNTRY!!!"

    Thanks for trying though, Duncan!


  • Ken D. on February 07, 2013 10:54 AM:

    *Of course* people invade these accounts when they need to, which one can't do with Social Security retirement benefits or a defined benefit pension. This is an obvious, widely ignored dark side of the "ownership society" concept. I think I understand the concepts as well as anybody, and was fortunate enough to make it to retirement age with my 401k-type savings intact; but for powerful enough reason I absolutely would have invaded them, even at the price of being more vulnerable in old age. And another thing: the main carrot for these accounts, tax deferral on interest income, means little in an ultra-low-interest era.

  • Mudge on February 07, 2013 11:56 AM:

    Black's main concern was the near-to-retirment generation, many of whom raided 401(k)s to survive the recession. Many of whom lost jobs that will never return and many of whom lost significant value in their homes. That generation also has parents in their 80s or older and children around 30 who may be unemployed. Both may be asset drains, especially an elderly parent needing 24 hour care in states that refuse to expand Medicaid.

    Kim's idea would largely help younger folks avoid future problems, not help those experiencing them now.

  • John on February 07, 2013 12:39 PM:

    There is an elephant in the room, and it is poverty in old age. This is where the US is fast heading in my opinion. With defined pensions rapidly disappearing, stagnating and/or declining wages, near zero interest rates on savings, rampant ageism for those in their 40s and 50s who are pushed into unemployment, a huge looming disaster is approaching. I'm firmly convinced that many 40+ folks who are currently Middle Class, will descend into poverty in the years ahead.

  • Justin on February 07, 2013 1:00 PM:

    I have to say, while sympathetic to Black's point, his analysis is awful. He acts as if 401(k) is the only vehicle for retirement savings. But that's not true; many people save through less tax-advantageous vehicles, home ownership, etc., PLUS social security. So the average person isn't living on his (insufficient to live off of alone) 401(k). Black overstates his case right off the bat, making it hard to take him seriously the rest of the way through.

  • Ann on February 07, 2013 1:39 PM:

    Didn't everybody who had a 401(k) lose all of it in 2008 except for the initial investment? Many employees were incouraged to make small initial investments, such as $25 a month so they lost everything else after however many years they had been working, even if the contribution was increased as their income increased.

  • noplot on February 07, 2013 2:33 PM:

    Ann--not everyone. I actually gained a bit in 2007-08 due to my laziness. I had transferred my 401(k) from the old employer to the new upon moving in July 2007 and was supposed to pick investment options. Well, I had to unpack and then got distracted or something so I never did and it stayed in the default option.

    Which was a "stable state" option that gained 2% each year. Not much, but a darn sight better than anything else turned out at that point. Unfortunately, they closed that particular option after 2008, but it taught me that making moves to beat the market is about as useful and easy to do as porcupine juggling.