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
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?