Killing off the 401(k), one CSPAN call-in program at a time

I'm going to be on CSPAN Monday morning from 8 to 8:30, talking about the "Should the 401(k) Be Killed?" column I wrote a few weeks back. So this seems like a good time to go through some of the e-mail I got in response. Most of it was disapproving, as were the letters to the editor. A sampling from my inbox:

Your statement that 401(k) tax breaks mostly fall into the laps of high earners is false. My wife makes $35,000 annually and she reduces her federally taxable income by $1 for every $1 she contributes to her 401(k). A wealthy person also receives the same tax break. My wife's accumulations also grow tax deferred, just like the wealthy persons accumulations. The wealthy do not proportionally gain more from 401(k)s than do the less wealthy.

... Most 401(k)s give the employee some control over where the money is invested. This allows younger people to invest more aggressively than those nearing retirement. Pensions provide no control. The older person's claim on penson funds is invested in the same assets as the younger workers. There is no control there.

That first argument is plain wrong. Somebody in a higher income tax bracket benefits more from any tax deduction—be it for a 401(k), mortgage interest, whatever—than somebody in a lower bracket. That's just simple math: 33% of $1 is worth more than $25% of $1.

The second point is more interesting. Any well-run pension fund is going to take into account the age of its participants, while lots of 401(k) owners inadvertently invest in totally age-inappropriate things (old people in stocks, young people in money-market funds). What is true is that the 401(k) allows individuals to choose how much risk they want to take, and if you're willing to take really big investing risks you might end up with far more money in retirement than a pension would have delivered. But you also might end up with nothing.

Another e-mail:

I read the articke entiltled Kill the 401K and couldn't contain my disgust, not at you but at the suggestion that:

1-Scholars

2-Politicians

think it's time has passed. Looking at these two groups alone and believing they "have a better way" should cause each and every participating 401K plan employee to run; not walk to their computer and e-mail each of these two groups with a simple "leave it alone".

Politicians are responsible for nothing 401K related, and with the right amount of time and effort will create another Social Security mess. Scholars are busy working in theory, not reality and with sweet pensions and retirement plans provided by universities that are funded with taxpayer money; they too have very little "sway" in this discussion. Or as the saying goes, neither politicians or scholars have a "dog in this fight".

The creation of the 401(k) may have been inadvertent, but Congress has done an awful lot since then to cement its dominance and make it ever less attractive for corporations to offer traditional pensions. So saying that politicians don't have a dog in this fight is more than a little odd. Also, the particular replacement for the 401(k) that Teresa Ghilarducci is pushing for—which I mentioned briefly in my column—is modeled on the successful retirement program for college and university employees managed by TIAA-CREF. But I do appreciate the first-do-no-harm argument against tampering with the current setup.

And finally:

You want the American people to allow Congress, a know entity the has even a lower approval rating than president Bush, to handle our retirement money, and then fund it by one of the only income tax breaks middle income Americans can actually benefit from.

I usually am writing about the Right-Wing, Radical Rheotoric of Rush Limbaugh, but now I'll have to add Left-Wing, Lying Liberal to my list of reviews.

First,the Media-Malpractice of the Left-Wing, Lying Liberal Media ensured Obama's election by not investigating him, but rahter focusing the American voter on Sarah Palin's wardrobe, which I could careless about.  So now, as Americans wake-up to the fact they know nothing about the new president-elect, you are pushing for the government to kill the 401(k).

First of all, there was never any discussion of Sarah Palin's wardrobe in this here blog—just the election's season most deep-digging analysis of who is actually most qualified to be president. As for the 401(k), I'm really not out to kill it, just to point out that it ain't all it's cracked up to be. For example, is it really "one of the only income tax breaks middle income Americans can actually benefit from"? Well, depends on how you define middle income. From a 2004 study by the Urban-Brookings Tax Policy Center:

We find that about 70 percent of tax benefits from new contributions to defined contribution (DC) plans accrue to the highest-income 20 percent of tax filing units in 2004, and more than half go to the top 10 percent.

Want to know more? My friend Anne Tergesen had an article on the dump-the-401(k) movement in last weekend's WSJ that's far more exhaustive than my column. Check it out.

Update You can watch the C-SPAN interview/call-in here.