Riding Into the Sunset
The most damning fact about the 401(k) experiment is that it has failed to fulfill the original purpose: boosting savings for ordinary Americans. Academic studies have confirmed that the personal accounts produced "very little net savings" or "statistically insignificant" gains. While every worker could participate in theory, the practical reality is that only the more affluent families could afford to take full advantage of the 401(k) tax break--sheltering their annual 401(k) contributions from income taxes. But typically they did so simply by moving money from other conventional savings accounts into the tax-exempt kind.
More affluent Americans thus reduced their income taxes, but their net savings did not actually increase. For two decades, the federal government has been heavily subsidizing "savings" by the people who needed no inducement because they were already saving. Think of it as welfare for the virtuously well-to-do. A rational government would phase out such a misconceived program. Bush is instead proposing to make the contradictions worse by adding still other tax-exempt savings vehicles designed to benefit the affluent.
The old system of defined-benefit pensions had many strengths by comparison, but it was never a solution to the national problem either. Even at their peak, the traditional corporate pensions left out half of the workforce. Larger companies, especially in unionized industrial sectors, provided strong benefits for their employees, responding to labor's bargaining demands and to attract well-qualified people. But the millions of very small firms, where more Americans work, almost never offered pensions. The burden either seemed too costly or too complicated to administer. Generally, their workers are the folks who depend solely on Social Security.
The corporate pensions are also not portable (a problem the individual accounts were supposed to solve). And pension law gives corporate managers ample latitude to game their pension funds to enhance the company's bottom line. Stories of elderly retirees stranded by their old employers are now commonplace: broken promises on healthcare and other benefits that go unpunished. Instead of accumulating larger surpluses during the good times, the corporations often did the opposite, leaving their pension funds severely underfunded for the bad times, when shortfalls couldn't be overcome. Employees have no representatives to speak for them in the decision-making. If a corporate pension fund goes belly up, its liabilities are dumped on the government's insurance agency, which is getting strapped itself.
Alogical and achievable solution exists to correct this mess. Government should create a new hybrid pension that combines the best aspects of defined-benefit and defined-contribution versions--one that requires all workers to save for the future and no longer relies on the "good will" of employers. Given modern employment patterns, workers do need a portable pension that stays with them, job to job. But their voluntary savings are simply too small and erratic--too vulnerable to manipulation by financial brokers--to produce secure results in the stock-market casino. Either they get lured into wild gambles or they park their savings in mutual funds that gouge them with inflated fees and commissions while catering to the corporations that are the funds' largest customers (this conflict of interest between large and small customers is endemic to the US financial system; guess who loses). The employees' money will produce far more reliable accumulations if it is invested for them by professionals at a major independent pension fund that works only for them.
The fundamental truth (well understood among experts) is that individualized accounts can never match the investment returns of a large common fund, broadly diversified and soundly managed, because the pension fund is able to average its results over a very long time span, thirty years or more. A few wise guys might beat the casino odds, but the broad herd of small investors will always be captive to the random luck of bad timing and their own ignorance. The right wing's celebration of individual risk-taking in financial markets is like inviting sheep to the slaughter.
The super bull market is over. Its gorgeous returns will not return for many years, maybe many decades. But a very large, diversified pension fund--managed solely in the interests of its contributors--provides the vehicle for "shared luck." It can smooth out the ups and downs among all participants, young and old, lucky and unlucky. It can invest for long-term economic development rather than chase stock-market fads. Good returns for retirees, good results for the economy.
These are the very qualities Professor Fogel envisions. They describe trustworthy pension systems, like TIAA-CREF, which reliably serves many thousands of individual employees (teachers and professors) who are scattered across many different employers (schools and universities). The present reform debate is not thinking this way. Collective action is out of fashion, especially if the government is involved. Significant reform would require institution-building. The transition would pose many technical difficulties. "There are obstacles, but I don't think that's the problem," Ghilarducci says. "The obstacle is imagination."