Retirement Benefits

How on Earth Is a 401(k) a Government Subsidy?

A journalist proposes taxing the money people set aside for savings and then forcing them to save money via the government instead


You can't make a new bureaucratic omelet without breaking a few nest eggs.

Financial reporting has a tendency to make me feel either really smart or really dumb (kind of like playing Portal for the first time). My background, both in journalism and as a human being, is not particularly connected to the financial sector, so I continue to learn (or get really confused) by more experienced journalists who focus on markets.

I bring this up because I became extremely baffled by this piece over at The Atlantic, titled "The 401(k) Is a $240 Billion Waste" by Matthew O'Brien, an associate editor there. Here's how it begins:

Imagine there were no 401(k)s. You wouldn't stop saving for retirement, right? Right? Don't worry, I won't tell Suze Orman. Not that CNBC's personal finance guru would get mad at you—according to a new paper, most households wouldn't sock away any less for their golden years if we eliminated 401(k)s. Which raises a $100 billion question…

Why subsidize retirement saving if the subsidies don't work?

My initial thought was "What subsidies? What the hell is he talking about?" It turns out that O'Brien is describing the tax revenue the government doesn't immediately get from the income socked away in 401(k) programs as a subsidy. And if the money Americans are putting away for retirement were taxed, the revenue would add up to about $240 billion a year. He even goes so far as to classify money the government isn't receiving as "spending."

O'Brien doesn't appear to acknowledge that the taxes on most 401(k) contributions are only deferred until retirement, not eliminated. It doesn't appear to be relevant to him. His point – as far as I can grasp it – is that because people who go through the effort to save money in 401(k)s would do so regardless of the tax benefits, let's tax it now.

His evidence is a study from Denmark showing that the populace saved only slightly more than they would have without the "subsidy" from their version of 401(k) funds.

He makes no mention of matching funds from employers. There's no mention of how much revenue the federal government takes in from 401(k)s that mature each year. There's no analysis of the rate of returns for 401(k) funds vs. other retirement options. I know that's probably a bit too much to ask for a short piece like this one, but my own personal non-profit 403(b) (rolled over from the 401(k) from my previous for-profit employer) is currently outperforming California's Public Employees Retirement System pension fund investments.  Here is his conclusion, which ultimately left me dumbstruck, wondering if I'm too stupid to understand his argument:

It turns out the best way to get households to save more is … to make them save more. In other words, automatically take a percentage of each person's paycheck and put it in a retirement account, as a default. If this sounds familiar, it's because that's how the payroll tax works — except it's how you think the payroll tax works now. There's a misconception that the money the government withholds from you every month ends up in an account with your name on it that eventually becomes your Social Security benefits. It doesn't. The money the government withholds every month pays for current retirees, which is why the system needs some kind of tweak over the next few decades as the Boomers retire. 

So he wants to tax the income that people would have put into savings and then just force them to save even more money for retirement, while still having a Social Security system that just needs "some kind of tweak over the next few decades"? That's the argument? The government has done an awful job managing Social Security so let's get rid of the 401(k) and start a new forced savings program for the same government to manage!

Why the hell would anybody – particularly members of the sacred cow known as middle class – support this idea?

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  1. Any money the government allows you to keep is a subsidy for you and an expense for the government. You should be thankful for every penny they don’t take for matters far more worthy than individual survival.

    1. Everything for the State, nothing outside the State, nothing against the State!

    2. Yes, the idea can only come from the idea that all we have and are is, ultimately, the government’s.

      A concept that, by the way, was (mostly) repudiated long before this country was founded, even in English law.

    3. Exactly, you didn’t earn that! Without the government you would be living in a cave, freezing and starving somewhere.

      And Scott, no you are not stupid. If any of this ridiculas BS ever starts to make any sense at all to you then you are in big trouble and should commit yourself immediatly. People do look at the tax implications in deciding HOW to invest their money for retirement. The main reason there may be little difference in HOW MUCH they sock away (and I’m not conceding that’s true) is that most people likely tend to put away as much as they feel they can.

    4. Eventually they’ll just switch their terminology. Instead of debating tax rates, lawmakers will debate subsidy levels.

  2. what the shit? 401Ks ARE a subsidy. You’re only allowed to spend them using certain “managed” investment schemes. So, those managers, are subsidized. As are the investment classes that 401Ks are allowed to put their money into.

    1. they’re also a subsidy in favor of people who get to live till retirement age, which excludes individuals who have progeria, or huntington’s. It’s a pretty small corner case, but it’s a corner case nonetheless.

      1. What? Not taxing something = subsidy?

        1. it’s a government shelter that certain people cannot take advantage of. Maybe that’s not strictly speaking a subsidy, but it’s government advantage.

        2. Randian|11.28.12 @ 1:19PM |#What? Not taxing something = subsidy?

          Yes. I would start with eliminating breathing subsidies then work my way to vision and hearing.

        3. If the tax reduction comes with corresponding spending cuts, then no. But that never actually happens. If spending stays the same, but you exempt one group of people from paying for it, you’re necessarily pushing that cost onto other people.

          So it’s not a subsidy in the absolute sense, but it is in the relative sense.

      2. 401(k) savings are inheritable. You do have to pay any inheritance tax as an asset, but its not Social Security. Your heirs get the full amount without any additional penalty or subsidy as any other cash account. So it doesn’t punish those who die early. They don’t get to access it, but it doesn’t evaporate. Also, you can access it for first home downpayments, dependents college tuition, and certain medical expenses without penalty.

        1. Can an inherited 401(k) be cashed out? Or does it roll into a 401(k) under the heir’s name? If it is cashed out, is it taxed as income at that point?

          1. Can an inherited 401(k) be cashed out?

            Yes. But you will get creamed on taxes. Don’t do it.

            Or does it roll into a 401(k) under the heir’s name?

            Yes. Simply change the account holder from the deceased to the heir. I think you may get penalties for rolling it into your existing 401 (k).

            If it is cashed out, is it taxed as income at that point?

            Not as income, but as capital gains. Don’t do it, unless you are in serious need for cash.

            I’m not an accountant, and this was not meant as tax advice.

            1. “I’m not an accountant, and this was not meant as tax advice.”

              Good thing, because about half of it is wrong.

        2. if you have down’s syndrome, which gives you alzheimer’s like symptoms (for mild cases, between the ages of 30-40). Then you’ll probably die by age 50. Having that extra chromosome makes it hard to have kids.

          1. oh, I was wrong, people with down’s can have kids.

      3. You know, you can just as easily rob people on your own initiative.

    2. You’re only allowed to spend them using certain “managed” investment schemes

      Not true. Many 401K plans are moving to families of ETFs instead of managed-funds. Some *are* limited, but in general they’ve been moving away from that model for 20 years.

      And clearly you don’t understand why funds have expenses. Its not all caviar coke and blowjobs. If you simply tried trading your own TD Ameritrade account with similar piddling sums (most are not contributing the max $17K), you’d still rack up a higher ‘expense ratio’ than most managed funds while also underperforming.

  3. Here is his conclusion, which ultimately left me dumbstruck, wondering if I’m too stupid to understand his argument

    It’s not you who is too stupid to understand his argument. It’s him.

    1. well he’s right that it’s a subsidy, but it’s not a subsidy for the individual.

      1. sub?si?dy/?s?bsid?/
        A sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive
        – a farm subsidy
        – they disdain government subsidy

        A sum of money granted to support an arts organization or other undertaking held to be in the public interest

        A sum of money paid by one government to another for the preservation of neutrality, the promotion of war, or to repay military aid

        A grant or contribution of money

        1. It’s also when the government allows someone to keep their own property when it could have been taken away. Everything you own is a subsidy, because the government could take it from you at any time, but hasn’t.

          Might makes right.


        2. so, if I wanted to offer someone a investment package and do some good for her and me, I would be competing on a level playing field?

          I stand corrected. It’s not a subsidy.

      2. yone, just because a government program increases the volume of business does not make it a subsidy of that business. Even though subsidies often increase volume, not every increase in volume is a subsidy.

        1. What is it, then?

          1. I take the position if that the government is directly OR indirectly shoveling money in the faces of rich people, it’s a subsidy.

            1. like solyndra, for example. By a strict interpretation, it wasn’t a subsidy; it was a loan.

              But fuck pedantry. It was a subsidy, and a failed one, too.

              1. While it was a loan it was still a subsidy because it was a loan on more favorable terms than they could have gotten on the open market.

                If the market rate for me to get a $1,000,000 loan for 5 years was 6% and the government offers me one for 3% (or even puts a partial guarantee on the loan lowering my rate to 3%) then I have recieved a subsidy in the amount of the reduced interest paid. In this case somewhere to the tune of $80,000

            2. yonemoto| 11.28.12 @ 2:30PM |#

              I take the position if that the government is directly OR indirectly shoveling money in the faces of rich people, it’s a subsidy

              the “government” isn’t shoveling anything. Individuals are *choosing* to participate in a program.

              You are suggesting because those programs have fees that this is a ‘subsidy’ to investment managers. Its already been pointed out (by douchehat o’Brien) that sans tax benefits people would still invest in equal numbers – just suffer higher taxes. They might pay (slightly) lower fees over time (particularly when investing in small amounts, even eTrade adds up)…but they don’t benefit. The only reason 401k plans tend to limit funds to certain areas is because there is the assumption that this is “retirement” money – not “get rich overnight” money – and hence they tend to skew towards balanced-asset/conservative-allocation offerings. (i.e. a ’60/40 managed stock/bond portfolio within a fund’)

              I actually agree they suck when they limit employees to certain fund groups. Well then, if the employer isn’t *matching*, then so the fuck what? Don’t do the plan. Do what you want – its a *choice*

              1. I’m pretty sure that 401k s are regulated up the wazoo and it’s not just “any” investment manager that can enjoy the fruits of their subsidy.

                1. and it is a subsidy because people are pushed into these investment schemes thanks to inflation (which is a government driven phenomenon).

                  And, yes, I do not participate in 401ks, thank you.

                  1. yonemoto| 11.28.12 @ 4:46PM |#

                    and it is a subsidy because people are pushed into these investment schemes thanks to inflation

                    Pushed, as in “choose” over other options.

                    You sir are a twat.

                    1. Yes, your (tax-free) options are basically, 401(k) or IRA. Both of which are limited investment classes. Both of which are heavily managed by wall street by companies that charge management fees and certainly skim a little bit off the top.

                      If you can’t see that this program is a subsidy for wall street managers, then I may be a twat but you are a fuckwad.

                2. “pretty sure”

                  As in = you don’t know shit and are just projecting.

                  Here- start at the letter A for a sample list of ‘eligible funds’


                  pretty much every mutual fund on gods green earth

                  Now ETFs… I know JPMorgans in-house program uses a menu of approved ETFs…but agan – you ignore the larger point = you don’t like the offering, go set up your own traditional IRA and fuck off.

                  1. So if it’s so easy, why can’t i find “how do I start my own 401(k) management firm” instructions online. You can certainly find “how to start your own corporation” instructions all over the place online.

              2. so, you are arguing “it’s a choice” while one paragraph earlier you’re explaining why the “choice” is limited. Must be nice to be able to get one of those 401k fund manager medallions and skim a little bit off the top of all those people taking their tax-sheltered investment vehicles.

          2. Its a tax deduction, that’s what it is. Some of us find it useful to use different words for different things.

            Question for you: if a tax deduction is a subsidy because it “shovels money in the faces of rich people”, (although how keeping your own money is having the government shovel money in your face, I’m not clear), then allowing rich people to keep any of their money must be a subsidy, too, right?

            1. Actually it is not even a tax deduction, it is a tax deferement as you will still have to pay income taxes on that money when you retire and begin to draw on the account.

              1. And the dirty secret of 401(k)’s is that the tax rate when you retire is likely going to be higher than the tax rate at the time you earned the money.

            2. RC, the “rich people” I refer to are the fund managers, not the average schmoe with the 401k plan.

  4. Doesn’t matter anyway. It’s only a matter of time before Uncle Sam seizes everyone’s retirement to pay off the Ponzi schemes.

    Savers are stupid.

    1. It scares me to think what could happen–massive tax raid, change in legal protections for retirement assets, high inflation, etc. Would be nice if the government would, you know, cut spending.

      1. Fuck you, I agree.

      2. You should be worried about far worse than that. That move will result in a lot of violence. The real kind with gunfire and dead bodies.

        1. Fuckin ‘a. If they seize my savings and brokerage accounts, I can’t be held responsible for what I might do with a board with a nail sticking out of it.

    2. buy gold! The government can’t seize that!

      1. Why not? FDR did.

        1. should have put more ones.

      2. You mean buy gold under the table and on the down-low, right? Because otherwise it’s “papers, please!”

    3. If there was only some way that the government could meet it’s financial obligations.

      1. some other way I should say.

      2. Yes, if only there were some other way that the government could meet it is financial obligations.

    4. This is what I am waiting for, for I’m pretty sure it’s inevitable. The only question is what form it will take.

      1. I doubt it will be an out-and-out grab the first time around. I imagine what’ll the thieves do is just get rid of 401(k) and 403(b) tax exempt status, charge out the tax at some high level (a flat 25% for simplicity’s sake–don’t want to make the tax code all difficult hahaha) and “sweeten” the deal by saying it will come back to you through the miracle investment that is Social Security.

        1. No, it will be even more subtle. They’ll still call it a 401(k) or whatever, but you’ll be forced to put some percentage into government bonds, for your own safety and to help the government through the fiscal crisis.

          Then the percentage forced into the government bonds will go up, the yield will go down, and inflation will skyrocket, making your “investments” essentially worthless.

          1. I believe it.

            Seriously: Can I subscribe to your newsletter?

            Also, please never run for elected office.

      2. I think, as usual, California leads the way on this issue. The CA legislature passed that retarded bill deducting 3% of the wages from every worker in the state and investing it CALPERS.
        It’s supposed to be a mandatory retirement saving program, but it’s only a matter of time before the legislature raids it to pay for the emergency boondoggle of the moment.

        1. The state is violence, and the state is theft. That’s all it is. And it proves it more and more every fucking day.

        2. Wait a second… everyone pays into the Public Employee’s Retirement system? What in the holy shitfuck?

          By the way:

          Employee recognition program

          The employee recognition program has several components:

          An informal day-to-day employee-to-employee program with a “You are the Rock” theme.[121] The program includes a river rock that is passed around to employees who are “rock solid,” rock-shaped notes with appreciative sentiments written on them, and rock-themed e-cards.[122][123]

          Fucking hippies.

          1. Yeah but everybody also gets a piece of it when they retire! I don’t know if private employees get the same sweet DB deal that public employees do, but with the responsible California Gov’t holding the purse strings, what could possibly go wrong?

            1. Does Mark Zuckerberg get to count his Facebook IPO year as one of his high-3?

        3. I think the bill only applies to private sector employees with no retirement coverage (presumably full-time employees) and you can opt out, according to an article I read. Did Brown sign the bill?

          1. It applies to every private sector worker regardless of other retirement savings. You can opt out, but you have to do so every year.

            With a scheme like that, how could Moonbeam have said no?

          2. Yes. There needs to be another vote though after they set up the system to actually start. I’m actually working on a lengthy piece on the plan.

    5. I think what will happen isn’t outright seizure, but slow-motion seizure: The feds will require that every tax-advantaged retirement account hold a certain (rising) percentage of assets in Treasuries. Thus creating a captive market for its debt and seizing (via regulation) that part of the retirement account.

      Naturally, those Treasuries will be brutally haircut at some point, either overtly (as has happened to some Euro-area bonds) or covertly (via inflation/rising interest rates).

      1. Nah, that’s all too complicated. They’ll just print the money, and POOF! your retirement is gone. Well, you’ll still have it, but it won’t be worth much when toilet paper is $10,000 a roll.

        No need to do anything other than that.

        1. No reason they can’t (and won’t) do both.

  5. Democrats definition of a subsidy: When the government takes less than 100% of what you earn.

    1. If 5% appears too small
      Be thankful I don’t take it all.
      (RIP George Harrison)

  6. Yes — we savers are undoubtedly the next cash cows who will be tapped.
    I should convert all my assets in bourbon. That stuff lasts forever, is a great trade good, and, if the apocalypse doesn’t arrive, I still have a good use for it.

    1. Or a distillary to make bourbon. Hidin’ from revenuers no doubt.

      1. If I had equipment like that, I’d be making a backstrap molasses rum this weekend. And plan on double or triple distilling a white rum out of half of it and using chips from my whisky aging (which again, is totally hypothetical) to make a dark rum out of the other half.

        If I had a still.

        1. Stills are not hard to make, or so I’ve heard…

  7. So I don’t imagine O’Brien would let us pay the tax upfront and go Roth, either. (I’m converting some IRA money into a Roth this year — fiscal cliff and all, you know. I mean, I can’t imagine my tax rates going down in the future. I might as well pay the tax now and be done with it forever — or until the mob figures out a way to get their hands on the Roth, too.)

    1. I would rather not pay taxes now, because I do not trust the government not to tax me on the other end if I do pay now.

      1. This is exactly why I’m constantly locked in a to-Roth-or-not-to-Roth dilemma.

      2. That’s my fear with a Roth, and why I haven’t started one.

        All it takes is a stroke of the pen from those bastards, and then your Roth is taxed on the back end.

  8. And O’Brien would favor also making people with pensions pay income tax on the employer’s contribution to their pension fund? This would have the side benefit of making pretty much every public employee over the age of 60 part of a 250k per year household, lucky them.

  9. The money the government withholds every month pays for current retirees, which is why the system needs some kind of tweak over the next few decades as the Boomers retire.

    I agree if by “tweak” he means a pandemic, large asteroid that hits only retirement communities, discovery that old people soup is the new meth, or WWIII.

    1. Yeah, I saw that too. I’m certain the fact that we have about 115 million full-time workers and about 110 million recipients of SS/Medicare/Medicaid never crossed his mind.

    2. How about a tweak to assign the money to your own account, and make it tax deferred… oh wait, that would be a 401(k).

  10. John Dillinger robbed banks because that was where the money was. The government will raid retirement accounts for much the same reason.

    1. Actually, it was Willy Sutton who coined that phrase, but your point is spot on.

    2. And yet they still wont legalize and tax drugs

    3. I believe it was Willie Sutton who said that.

      1. (For the record, I opened the page before the other responses appeared.)

        1. I believe it was Willie Sutton who said that.

          1. No, THAT one was John Dillinger.

  11. Not stealing that money is OBVIOUSLY the same as a subsidy!

    Were you people raised by wolves?

    1. Grrrrr, rowf, snarl snap!

  12. It is just absolutely offensive that the government is looking for new revenue sources to fix the trillion-dollar deficit.

    This sort of naked avarice is just amazing to witness.

    1. Just wait until we get a Latin American style populists who seizes the oil industry because Big Oil’s evil profits aren’t benefiting the American people.

      I seriously believe that that will happen in my lifetime.

    2. It is just absolutely offensive that the government is looking for new revenue sources

      They (the government) are not looking. They don’t have too:

      Top journalists at the Atlantic will do the work for them.

  13. If the referenced study’s conclusions are accurate, and net household savings are unaffected by the existence of a 401K program, then that part of the tax code should be scrapped.

    And “forced savings” is exactly what SS privitization is.

    So beyond the usage of the work subsidy, there’s not really all that much stupid here.

    1. I seriously would not be saving 8% of my gross (12% with the match) if it were not part of a tax deferment program. I am just that irresponsible.

      1. I’m skeptical of the study’s conclusions too. But I didn’t review it at all. I doubt O’Brien did either.

      2. At the very least, I wouldn’t be saving the part of the money that I would now have to pay in taxes. I (by definition) save everything that I don’t spend or pay in taxes. If my taxes go up because I don’t the exclusion, then necessarily my savings will go down unless I also cut my spending somewhere (which I would be unlikely to do).

    2. If the referenced study’s conclusions are accurate, and net household savings are unaffected by the existence of a 401K program, then that part of the tax code should be scrapped.

      Not necessarily. Retirement accounts serve two purposes: (1) incentivizing savings and (2) giving retired people assets so they don’t become as much of a burden on the public fisc.

      1. Except the study concludes that the supposed incentives of a 401K plan don’t actually work. And it also concludes that the savings level would be the same.

        As I replied to another poster, I’m skeptical of these conclusions. There was practically no investor class before the creation of IRAs and 401Ks.

        But, if we, as the writer, assumes the conclusions are accurate, then the 401K provisos simply churn paperwork (and the associated costs) with no net result.

        1. But the analysis was also in Denmark, not the U.S.

          1. And that’s the other part of the problem–comparing Denmark to the US is like comparing Nevada to Canada. We’re talking different cultures, different populations, different levels of economic scale, different infrastructures.

        2. The study goes to the first purpose, not the second. Those retirement accounts lock up your money until you retire, so even at the same savings rate, the second purpose is advanced.

    3. No there is still a HUGE problem with this.

      401k savings ARE taxed, they are taxed as normal income when you begin to spend them.

      Taxing the 401k savings now would horrendously complicate retirement savings because part of the account (the deposits) would have already been taxed and part of it would not have been (the interest earned) meaning you need to figure out how to account for that as the person begins drawing on the account (is this deduction from principal or interest? What percentage is from which?) or just double tax people on their savings. Then if I am going to be double taxed on my retirement savings why the hell would I EVER save for retirement with anything but tangible assets which could be resold when I needed the funds?

      The point of not taxing 401k contributions is not simply a tax cut to encourage people to save more, it is a concession to the reality that double taxing people actively discourages them from doing so.

  14. I think it’s fair to assume, when writing about tax incentives, that the existence of income taxes is a premise to the subject. They are a fact, even if the premise of libertarianism is that they should not exist. Anyway, people who can afford to save in a 401k get a tax benefit in the form of a lower marginal rate than they would otherwise be charged. Not everyone gets this; it’s a selective break from taxes they otherwise would have to pay. I think it’s fair to call that a subsidy.

    The part of that study I thought libertarians would be interested in was the main one: these savings incentives (or subsidies) don’t do what they are supposed to do – namely, create more savings. They just concentrate savings in tax efficient vehicles. If your public policy goal is to get people to save more for retirement, tax breaks – while nice for 401k savers – appear to be a less than optimal way of achieving it. So my takeaway was: hey, this added complication to the tax code has limited utility – maybe it’s not needed.

    1. Sorry: I meant to say lower average rate, not marginal rate.

    2. Anyway, people who can afford to save in a 401k get a tax benefit in the form of a lower marginal rate than they would otherwise be charged. Not everyone gets this; it’s a selective break from taxes they otherwise would have to pay. I think it’s fair to call that a subsidy.

      No, it’s a difference in tax rate, not a subsidy. It’s only a subsidy if you’re starting from the question-begging premise that anything the government doesn’t tax is a subsidy.

      1. Bingo, Rocks.

        Simple rule for recognizing subsidies:

        If it lets you keep more of what is already yours, its not a subsidy. If it means you receive a check from the government, it is a subsidy.

      2. My premise is that the government already taxes you according to your income. The government then offers you a deal: save in this particular way and don’t pay tax on the saved portion. In accounting terms, a dollar you don’t pay (that you otherwise would have) is the same as a dollar given to you. That’s why it’s reasonable to refer to this as a subsidy. I say this without prejudice to the position – which I happen to agree with – that income belongs to the earner in the first instance. But there IS a tax system, even if one thinks there OUGHT not to be.

    3. these savings incentives (or subsidies) don’t do what they are supposed to do – namely, create more savings. They just concentrate savings in tax efficient vehicles.

      If you’re having a portion of your check placed in a separate account every pay period–whether it’s a 401k, Roth, or local credit union savings account–you’re “creating more savings” by default even as long as you don’t draw down from the account until you retire. If you’re arguing that the problem is a lack of exponential growth, then I’d say that the problem is our Fed-induced inflationary economy, not the lack of savings.

      1. Creating more savings in an absolute sense, but not more savings than otherwise would have occurred without the tax break. In other words, tax foregone does not substantially increase the savings rate.

    4. They really do create more savings. The study’s conclusion defies common sense.

    5. If this is true:

      “He makes no mention of matching funds from employers. There’s no mention of how much revenue the federal government takes in from 401(k)s that mature each year. There’s no analysis of the rate of returns for 401(k) funds vs. other retirement options.”

      I don’t think you can reasonably come to that conclusion. Also, the Euro-centric study came to the conclusion that it did result in “HIGHER” savings for tax exempt plans. Just not dramatically higher.

      I like simplified tax structure as much as the next guy, but I think it has to be balanced with the attempt to throttle the avarice of government.

    6. Anyone that contributes to a 401k gets to defer taxes. There’s nothing selective about it at all. To say that any of these tax deductions, credits, etc. are subsidies, you have to imagine some alternate tax code where every item of income is taxed at some flat rate and thus all that money is the Government’s. Then every “discount,” by way of a lower rate, a deduction, a credit, etc. is a subsidy because it gives back what is the Government’s. That alternate tax code doesn’t exist. We have only one tax code. If you want to make up your alternate tax code, measure the breaks against that and call them subsidies, then have at it. But you also need to call subsidies the amounts that aren’t paid by folks that have marginal rates that are lower than the flat rate in the alternate perfect tax code.

  15. When the wealth tax comes, retirement accounts will be an easy target.

  16. Scott, Matthew O’Brien is not a financial reporter. He works at the Atlantic. They have “Team Blue Mouthpieces Who Write About Shit They Don’t Understand” and “Team Blue Mouthpieces Who Write About Economic Shit They Don’t Understand.” O’Brien is the latter, and this is a particularly stupid example of his regular authority-fellating crap.

  17. As if I needed another reason to feel like a fucking moron for being all debt-free and saving my money and shit. Even if the concept of 401(k)s survives, it is probably definitely time to switch from pre-tax to after-tax, right?

    1. If saving for retirement is so important, why tax the money at all on either end?

    2. I actually closed out my relatively meager 401k in 2009 for exactly this reason–because I knew the government was going to try and cover up a crappy economy with massive deficit spending, and that eventually they’d start to look at 401ks and other former safe havens for saving and investing as a potential golden goose. Looks like I was 3 years ahead of the curve.

      Rags like The Atlantic and Slate are bellwethers for left-wing SWPL hobbyhorses that will eventually be pushed as public policy at the national level. These guys are just setting the ideological narrative for their counterparts in government to start making this a reality without fomenting a severe backlash.

      1. I seriously feel stupider and stupider by the day but I don’t know where else to sock my money. Guns? Cultivate an expensive substance-use habit?

        1. Lead and lead-delivery devices.

          In all seriousness, there’s really no way to securely plan for a “golden years” type of future at this point, in my opinion. Every highly complex society, at some point, does a reversion to the mean when their social fabric and economic infrastructures can no longer support the level of scale at which that society exists. We have no way of knowing how things will shape out, but I think it’s pretty obvious the welfare/warfare state that FDR institutionalized will end up breaking apart in some fashion and reform in ways that will allow basic needs to be met in a less extravagent, more sustainable manner. But it’s going to hurt in the interim and no one will really escaped unscathed.

          People forget that even after the western empire supposedly “collapsed” after 476 AD, many of the empire’s bureaucratic institutions and traditions still survived to a greater or lesser degree all the way through Charlemagne. They just did so at a far more local/regional level and the infrastructure wasn’t nearly as complex.

        2. Cultivate an expensive substance-use habit?

          You have to figure, with this one, worst case is the state ends up paying your bills for a while. Haha, so funny!

          But, uh…yeah?

        3. I seriously feel stupider and stupider by the day but I don’t know where else to sock my money.

          Well, if you don’t have some hard currency (gold coins, if you have a lot of cash, otherwise, some “junk” silver or silver coins), that’s one place. The price is high now, but its fundamentally driven by (a) currency instability (which ain’t going anywhere and (b) the amount of inflation/money printing. So I think its a pretty safe bet, even at today’s prices.

          But that isn’t really an investment; its an insurance policy, a SHTF, we-gotta-eat type of deal.

          If you’ve got a semi-serious wad, try looking at productive land (you can do this with your IRA money). Should be pretty safe for the long run.

          For smaller amounts, look for hard assets (other than bullion or land) that tend to hold their value. Guns are a natural, of course. Most “collectibles” are not.

          1. Guns are a natural, of course.

            I know this…but, why? That is to say, what factors should one consider when deciding to start purchasing them with this in mind as at least a secondary purpose?

            1. Because there is almost no scenario involving monetary devaluation where guns wouldn’t hold their value due to their utility.

              1. Right. But I’m thinking that not all of them stay equally useful for long periods of time, right?

                1. A properly stored gun will be in working order for decades, and common calibers have a long active life. Don’t think of it as fashion, but rather emergency rations. They don’t have to be fancy, just keep your belly full.

                  1. Bizarrely, I didn’t actually think of it until just now, but I’m asking this and already planning to go gun shopping tonight. Sweet. And thanks Sug.

  18. ” …I became extremely baffled…”

    Repeat after me Scott…..

    Not giving is taking.
    Not taking is giving.

    Get with the program boy.

  19. A system of forced, or nudged, saving wouldn’t replace this social insurance, but rather the wasteful dinosaur that is the 401(k)

    The “Social Insurance” he refers to is Social Security. In the same sentence in which he calls 401(K)’s a wasteful dinosaur. That’s all you need to know about his financial acumen.

    1. Jeebus on a pogo stick. How is any savings account, however incentivized or encouraged, “wasteful”?

      I thought you could identify money that hadn’t been wasted by looking at savings.

      1. There are economists like Krugabe that think savings is wasteful.

  20. Imagine a government that didn’t tax savings.

    1. Like the one we had until 1913?

      I call it the USA savings plan:

      1. Put as much money away as you want every year (no limit), pre-tax.
      2. No taxes on your earnings.
      3. No taxes on your withdrawals when you retire.
      4. No penalty for early withdrawal, for emergencies or otherwise.

      How many people would still need Social Security with those rules in place?

      1. I’ve mentioned before that if Social Security was such a great deal, then people should be allowed the choice of setting aside their payroll tax in a separate savings account or in Social Security (with the provisos that you couldn’t actually pull from the account until you retired, and if you did partial payments in both, you’d get a partial payment from SS)–because logically, if it’s that great, then people will flock to invest in it.

        I’ve never actually had a liberal respond to this–not just because SS is merely a tax and not a savings vehicle, but because I think they know that if SS was merely a “public option,” it would immediately collapse.

      2. Fact: lots of elderly people died before 1913. Do you really want elderly people to die?

  21. Doesn’t the 401k money go into investment?

    Isn’t that money being used to build shit and employ people and eventually return a profit?

    What the fuck will the government do with it? Cuz their is no way in hell the government could return a profit…let alone employ people and build shit.

    1. It will invest in the future.

    2. They will “invest” in 100,000 more teacherzzz!!!

      And ROADZZ!!!!

  22. Rather than wanting the money, I suspect the real focus on getting rid of these accounts is that they lessens the reliance that retired people have on government. This is the progressive funhouse mirror version of the “skin the game” argument; or perhaps a “get rid of private schools” argument applied to old people.

    1. This. People with the wherewithal and sense to save for their own retirements will be the new The 1% in the future, so: stealing, because fairness. Lowest common denominator for all! Hooray!

      1. In retrospect, I’m surprised these sort of accounts were made possible at all. Doesn’t their very existence mean that the government knows SS is insufficient and probably unstable?

        1. IIRC, 401(k) was an accident. They were designed for a specific small purpose but companies saw the obvious advantage of them over defined benefit pensions and switched.

  23. Scott

    Good article. Excellent points.

    In addition, if a person were to forego 401k and save and invest the money outside 401k in exactly the same assets, the Taxes paid on the growth in the investment over the working life AT LOWER CAPITAL GAINS RATES would be significantly lower than tax on 401k withdrawls at higher ORDINARY INCOME RATES.

    1. That assumes very little turnover in the investment portfolio, m. Which, over a period of decades, strikes me as unlikely.

    2. Except that LTCG rates (probably) go bye-bye after 12/31/12.

    3. It also forgets that you’re putting pre-tax dollars into the account, and postponing taxes on investment earnings. You end up with a much larger balance at the end, because money the government would have drained away remains under your control and continues to grow. (Until the taxman axe eventually falls.)

  24. “Studies” that ask people what they would do in different circumstances are automatically suspect, because people lie, either intentionally or otherwise. O’Brien contradicts his own supposed theory (that people would save just as much without the tax deferral), by admitting that people don’t save as much when they’re not forced to. Take away the 401(k) plans, and most people would spend every dollar they take home. (Watch Suze Orman some time — people call in and have 800,000 or whatnot in their 401(k), and about 12,000 in liquid savings.)

  25. the wasteful dinosaur that is the 401(k)

    One of the most significant aspects of the personal retirement account (as has been pointed out already) is OWNERSHIP. If you die prematurely and leave the balance of your retirement account to your heirs, or the Flat Earth Society, that money does not go back into the Ponzi pot. In other words, in the mind of the Collective’s true believers it’s wasted.

  26. . My background, both in journalism and as a human being, is not particularly connected to the financial sector…so I continue to learn (or get really confused) by more experienced journalists who focus on markets

    As someone who started off writing about markets 15 years ago, and eventually started actually working in investments etc about 5 years ago…

    … look, pretty much every “journalist” in finance is a screaming fucking idiot.

    Even people who’ve worked in the business often only (barely) understand their little slice of the universe (re-insurance! credit swaps! interest rate arbitrage! leveraged derivatives! !@#($* micro-cap pre-approval biotech equity underwriting!)…and don’t have a coherent grasp at all of tax issues/implications. Seriously, even “personal finance retirement planning specialists” and shit… they often have a tax guy to call help out on real impact of whether Roth vs. 401k or whole-life insurance actually works best for an individual. And even then there are unknowables. Who really knows what cap-gains taxes are going to be like in *30 years*?

    I’ve run scenarios where I compared “tax on distribution” investing (401k/IRA) vs. Roth (“take tax now”), and in most cases the Roth outperforms because taxes in the future were higher than taxes in the past. Don’t get me started on mutual fund expenses. @#*$& criminals.

    in any case – said quoted journalist (O’Brian) needs a sound beating with a sack of rocks.

  27. I have lately been wondering if there are many people out there who will attempt to lock in the current cap gains rate on their holdings and then put that money into a Roth.

  28. the 401k from my previous for-profit employer is currently outperforming California’s Public Employees Retirement System pension fund investments


    the 4 guys playing craps behind the local bodega who sell black market cigarettes out of the trunk of their car? Yeah. *They’re* outperforming CALPERs.

    CALPERs has had a history of chasing the previous decade’s winners = they’ve been overweight emerging markets & EU equity… domestic real estate… etc. at the peak of bubbles. They also blow a lot of money on expensive active management which nevertheless underperforms. They also invest a few billions in things like Solar/Wind/Biofuels just so they can say nice things about themselves in their annual “Sustainability report”.

    CALPERs = sustainable… as the taxpayers pocket.

  29. People need to start being drawn and quartered for this shit.

    1. Wow.

      A representative of the liberal Pension Rights Center, Rebecca Davis, testified that the government needs to get involved because 401k plans and IRAs are unfair to poor people. She demanded the Obama administration set up a “government-sponsored program administered by the PBGC (the governments’ Pension Benefit Guarantee Corporation).” She proclaimed that even “private annuities are problematic.”
      Such “reforms” would effectively end private retirement accounts in America, Crone warns. “These people want the government to require that ultimately all Americans buy these government annuities instead of saving or investing on their own. The Government could then take these trillions of dollars and redistribute it through this new national retirement system.”

  30. It’s astonishing to me that there is no national discussion about eliminating income tax altogether.

  31. Why? I dunno.

    Why would anyone be in favor of an income tax?

    Why would anyone oppose replacing an income tax with a retail sales tax?

    Why would anyone be in favor of seat-belt laws, or Big-Gulp bans, or junk food taxes, or Obamacare, or bio/solar/BS-subsidies, or government-administered education, or bans on oil pipelines in Nebraska?

    Because most Americans are MORONS. They’re idiots. The average American can’t find UP. Dumber than fencepost. Stupid, pea-brained, sheep-like, paste-eating nitwits that all move as a herd.

    I’m sorry, but I’m having a really nasty case of honesty today.

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