The Wall Street Journal - Opinion
NOVEMBER 14, 2008
You may have heard about Argentina's plan to nationalize private retirement accounts. Some Democrats on Capitol Hill are inspired, and with their big election victory they may get the chance to test Peronist ideas in America.
Meet Congressmen George Miller and Jim McDermott, who are eager to change the way Americans save for their golden years. They'll also be powerbrokers in the next Congress. Mr. Miller, who came in with the Class of 1974 from California, chairs the House Education and Labor Committee. Mr. McDermott, who has represented Seattle the past two decades, runs a House Ways and Means subcommittee on income security and family support.
Before Election Day, the Congressmen began to target the $3 trillion in 401(k) accounts held by about 60% of Americans. Mr. Miller called the system "an inadequate vehicle" that "has not been terribly successful" in encouraging retirement savings. He wants a "wholesale re-examination" of pensions.
Just what alternative these Democrats support is unclear, and nothing has been formally proposed beyond Mr. Miller's plan to make the system "more transparent," reduce fees charged by the money managers, and suspend the tax penalty for seniors over 70 who don't take the "required minimum" withdrawal from their account, regardless of the market situation.
But the Chairman has also signalled greater ambitions. At a hearing last month, Mr. Miller put the 401(k) system into play. Under the current system, employers match employee contributions that aren't taxed until redeemed, an indirect subsidy worth some $80 billion today. "We have to start to think about in Congress . . . whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should," Mr. Miller said. "For a taxpayer investment of this size, we must ensure that the structure of 401(k)s adequately protects the nest eggs of participating workers."
His committee listened to possible reform proposals. Most eye-catching was an idea from Teresa Ghilarducci at New York's New School for Social Research. Her plan would end the tax breaks for 401(k)s; she proposes instead to give all workers an annual $600 inflation-adjusted tax credit for retirement and force them to invest 5% of their pay into a government-run retirement account managed by the Social Security Administration. She called the 401(k) "a failed experiment." A McDermott spokesman called her proposals "intriguing" and "part of the discussion." Mr. Miller hasn't so far endorsed the plan.
The main liberal objection to 401(k)s seems to be that they let average Americans control their own investment decisions for retirement. As Shlomo Benartzi, a professor at UCLA's Anderson business school, told Mr. Miller's committee, "Individuals have a tendency to buy at the peak, and then panic when the markets drop and sell at the bottom." Better to have the government do this instead.
It is certainly true that retirement plans have lost, on paper, some $4 trillion in the past 15 months -- half in 401(k) and IRAs and half in company defined-benefit plans. Average 401(k)s are down a quarter this year. But assuming sensible policies and a normal economic recovery, those asset values should rise again over time. In any case, investment returns on stocks and bonds over extended periods far exceed the paltry returns on Social Security that for some workers are a mere 1% to 2%.
Tax breaks alone hardly explain the popularity of 401(k)s. Over the past 30 years, the number of individuals covered by them nearly trebled, up to 65 million accounts, while the number under defined-benefit pension fell 30%. People are attached to their 401(k)s because it is their property, which they can carry with them to new jobs (unlike traditional pensions), manage as they see fit and bequeath to heirs.
Before entertaining dreams of state-managed retirement accounts, Congressional Democrats might ask why Europe and Latin America have tried so hard in recent years to move in the opposite direction. Their pension systems are debt-ridden, can't easily adjust for demographic shifts and show a historically lower return.
If Democrats want to improve the prospects for American retirees, their first priority should be removing barriers to economic growth. Anger over the drop in 401(k) balances is one reason that voters who belong to the "investor class" swung to Democrats in greater than usual numbers this year. Their mandate is for policies that improve those returns, not strip them of tax benefits.
NOVEMBER 14, 2008
You may have heard about Argentina's plan to nationalize private retirement accounts. Some Democrats on Capitol Hill are inspired, and with their big election victory they may get the chance to test Peronist ideas in America.
Meet Congressmen George Miller and Jim McDermott, who are eager to change the way Americans save for their golden years. They'll also be powerbrokers in the next Congress. Mr. Miller, who came in with the Class of 1974 from California, chairs the House Education and Labor Committee. Mr. McDermott, who has represented Seattle the past two decades, runs a House Ways and Means subcommittee on income security and family support.
Before Election Day, the Congressmen began to target the $3 trillion in 401(k) accounts held by about 60% of Americans. Mr. Miller called the system "an inadequate vehicle" that "has not been terribly successful" in encouraging retirement savings. He wants a "wholesale re-examination" of pensions.
Just what alternative these Democrats support is unclear, and nothing has been formally proposed beyond Mr. Miller's plan to make the system "more transparent," reduce fees charged by the money managers, and suspend the tax penalty for seniors over 70 who don't take the "required minimum" withdrawal from their account, regardless of the market situation.
But the Chairman has also signalled greater ambitions. At a hearing last month, Mr. Miller put the 401(k) system into play. Under the current system, employers match employee contributions that aren't taxed until redeemed, an indirect subsidy worth some $80 billion today. "We have to start to think about in Congress . . . whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should," Mr. Miller said. "For a taxpayer investment of this size, we must ensure that the structure of 401(k)s adequately protects the nest eggs of participating workers."
His committee listened to possible reform proposals. Most eye-catching was an idea from Teresa Ghilarducci at New York's New School for Social Research. Her plan would end the tax breaks for 401(k)s; she proposes instead to give all workers an annual $600 inflation-adjusted tax credit for retirement and force them to invest 5% of their pay into a government-run retirement account managed by the Social Security Administration. She called the 401(k) "a failed experiment." A McDermott spokesman called her proposals "intriguing" and "part of the discussion." Mr. Miller hasn't so far endorsed the plan.
The main liberal objection to 401(k)s seems to be that they let average Americans control their own investment decisions for retirement. As Shlomo Benartzi, a professor at UCLA's Anderson business school, told Mr. Miller's committee, "Individuals have a tendency to buy at the peak, and then panic when the markets drop and sell at the bottom." Better to have the government do this instead.
It is certainly true that retirement plans have lost, on paper, some $4 trillion in the past 15 months -- half in 401(k) and IRAs and half in company defined-benefit plans. Average 401(k)s are down a quarter this year. But assuming sensible policies and a normal economic recovery, those asset values should rise again over time. In any case, investment returns on stocks and bonds over extended periods far exceed the paltry returns on Social Security that for some workers are a mere 1% to 2%.
Tax breaks alone hardly explain the popularity of 401(k)s. Over the past 30 years, the number of individuals covered by them nearly trebled, up to 65 million accounts, while the number under defined-benefit pension fell 30%. People are attached to their 401(k)s because it is their property, which they can carry with them to new jobs (unlike traditional pensions), manage as they see fit and bequeath to heirs.
Before entertaining dreams of state-managed retirement accounts, Congressional Democrats might ask why Europe and Latin America have tried so hard in recent years to move in the opposite direction. Their pension systems are debt-ridden, can't easily adjust for demographic shifts and show a historically lower return.
If Democrats want to improve the prospects for American retirees, their first priority should be removing barriers to economic growth. Anger over the drop in 401(k) balances is one reason that voters who belong to the "investor class" swung to Democrats in greater than usual numbers this year. Their mandate is for policies that improve those returns, not strip them of tax benefits.
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