Is the 401(k) a good thing?

July 21, 2009

Mike Konczal (he’s come out now) says, plausibly enough, that the most important financial innovation of the past 30 years is the 401(k). Which is not to say, of course, that it’s a good thing.

Mike says the 401(k) is “the creation of a loophole in a tax bill”, which I think is doing it something of a disservice — the move from defined-benefit to defined-contribution pensions is a global one, and Mike’s really just using the 401(k) in particular as a proxy for defined-contribution pensions in general. Those would have taken off regardless, even if that particular tax bill hadn’t existed.

Mike’s right that such plans aren’t an obvious improvement on what went before. In fact, looking at his arguments in favor (“it’s a plus that consumers can directly manage their retirement finances”), one in general isn’t very impressed: there’s no reason to believe that consumers are particularly good at managing their retirement finances, and quite a lot of reason to believe that they can be extremely bad at it. That said, Mike’s right that there’s an air of historical inevitability to the whole thing. You might not like it, but it was bound to happen sooner or later.

There’s also however an air of historical inevitability about individuals schooling and working longer before they have families; I don’t think that the 401(k) was an important cause of that particular trend, although the hypothesis is intriguing.

In any case, Mike’s done nothing to counteract my thesis that financial innovation over the past couple of decades has been, on net, a bad thing. The 401(k) might be very important. But I’m far from convinced that Americans are better off for it.


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