Counterparties: Retiring the 401(k)

By Ben Walsh
March 13, 2013

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The first generation of 401(k) holders is retiring. Duncan Black, in USA Today, reports just how bad things are looking:

According to the Center for Retirement Research at Boston College, the median household retirement account balance in 2010 for workers between the ages of 55-64 was just $120,000. For people expecting to retire at around age 65, and to live for another 15 years or more, this will provide for only a trivial supplement to Social Security benefits… And that’s for people who actually have a retirement account of some kind. A third of households do not.

Americans have had more than 30 years to learn the ins and outs of this massive experiment in tax-deferred investing, but as Alicia Munnell, the director the Center for Retirement Research says, “we just don’t know how to do it”. What money people do save, they tend to manage poorly. They think they can do better than the market, or tend to choose financial professionals that are bad at beating it. More education isn’t going to fix the problem. As the Economist points out, financial education can actually lead to worse decision-making. And although the 401(k) costs $240 billion a year in tax deductions, research shows it doesn’t make people save any more than they otherwise would.

There’s a strong argument that defined benefit plans (like a pension, where the amount received is predetermined) should play an increasingly large role in funding Americans’ retirement. That’s the precise opposite of what has happened since the birth of the 401(k): in 1980, 38% of workers had a defined benefits plan; in 2008, 20% did.

There’s a simple way to alter this trend, Josh Barro writes: increase the size of the biggest defined benefit plan in the country, Social Security. It’s not only a remarkably efficient program, he says, it’s America’s “most important retirement-saving vehicle”, and should be expanded, not cut. Barro argues that we need to accept the reality that for most Americans, Social Security isn’t a way to supplement individual savings, but a primary source of funding for retirement.

Expanding Social Security shouldn’t be one-size-fits-all, says Kevin Drum. “The obvious way to address Social Security’s funding problems is to increase benefits to the relatively poor, whose benefits are low and who live shorter lives in the first place, and to reduce benefits for the well off”.

One thing is for sure: when 80% of stock market wealth is owned by 10% of the population, there’s no point in hoping that a soaring stock market might fix America’s retirement problems. — Ben Walsh

On to today’s links:

Sad But True
How the tobacco and soda lobbyists keep winning – Ben Smith

EU Mess
Meet Lee Buchheit, the “fairy godmother to finance ministers in distress” – Guardian

Oral Hazard
Too Sweet to Fail: The U.S. may bail out sugar processors – WSJ

Must Read
Martin Wolf’s terrific takedown of Britain’s disastrous fiscal policy – FT
“Cameron is more interested in rhetoric than he is in substance” – Felix

Startups
“Greed is good”: The story of Groupon’s bumpy, controversial rise – The Verge

New Normal
The last time US factory workers put in longer work weeks? WWII – Bloomberg
The payroll tax hike hasn’t really had any effect on retail sales – Business Insider
Religious affiliation in the United States is at its lowest point on record – Eureka Alert

Bad Ideas
eHarmony’s new business probably involves breaking Federal employment law – Inc.

Tax Arcana
Tax changes may be happening too quickly for companies to figure out how to evade them – WSJ

Servicey
“I believe the road to hell is paved with adverbs, and I will shout it from the rooftops.” – Brain Pickings

Popular Myths
No, higher taxes do not cause people to move to another country – Mark Thoma

On Private Equity
Carlyle deigns to accept investments from the mildly wealthy – WSJ

Wonks
We need a shadow CBO – Harper’s

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And, of course, there are many more links at Counterparties.

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