When ideas emerge out of fear instead of facts, consequences can be scary. Amid the tumultuous stock market and worries about the cost of the bailout, policymakers, politicians, and the presidential candidates are focusing now on the downfalls of 401(k) plans.
At a hearing before the House Committee on Labor and Education a few weeks ago, several experts testified about the effect of the financial crisis on these defined-contribution retirement plans, all but sounding the death knell for 401(k) plans. Certainly, 401(k) balance sheets have taken a hit of about $2 trillion since the beginning of the year – although these paper losses are not cast in stone unless they are cashed out or transferred to another type of investment. And most certainly, some who may have considered retiring in the next few years will want to work longer to recoup a portion of their nest eggs.
At the hearing, Teresa Ghilarducci of the New School for Social Research proposed a plan to let workers trade their current 401(k) plans in for a Guaranteed Retirement Account (GRA). This type of plan would pay a monthly amount at retirement, similar to an inflation-indexed annuity, at a guaranteed three percent real rate of return. Moreover, every worker would continue to contribute a mandatory five percent of his earnings into a GRA (the employer would contribute half), with the government depositing $600 a year, inflation-indexed, into the account of every worker. Ghilarducci notes that the plan has many advantages: First, for those who are worried a
bout fairness, the GRA plan, says Ghilarducci, would be fair. Since the current tax-deferred set-up of 401(k) plans benefits higher-income workers (uh…of course it does, since they pay most of the taxes), the GRA would eliminate the 401(k) tax subsidy to the “rich” in place of a $600 tax credit given to every worker. Another advantage, noted Ghilarducci, is that the accounts are prefunded since workers are saving their own money.
But unlike some mandatory personal savings plans, GRAs are not personal, per se, as they do not allow individuals to pick from a limited array of funds like the federal Thrift Savings Plan does. The money would instead be pooled and invested by the government as it sees fit. (Think about what the government has done with the Social Security Trust Fund, and then think about what they could do with your money).
Moreover, a GRA is no less immune to problems than a 401(k) plan. Although a guaranteed three percent real rate of return sounds good on the surface, in the fine print the government would have the right to reduce the guaranteed rate of return during economic down times and allow workers to access their funds during those times.
In essence, instead of strengthening 401(k) plans which have served most workers quite well, the fear-based solution is to gut them to the point where they become unattractive to retirement savers and employers, leaving people even more unprepared for retirement and relying on government entitlements. That is certainly a Halloween “treat” we could do without.