Why the 401(k) system is a blight on the face of the American republic

The baby boomers are in the process of retiring, and a great many of them are going to be utterly screwed if we don't do something about it.

The reason is that two of the three legs of America's traditional model of retirement — pensions, retirement accounts, and Social Security — have cracked to bits over the last few decades. Only Social Security is still strong. If it is to shoulder most of the retirement burden, as it should, it must be massively strengthened.

Defined benefit pensions still more or less work, but they're vanishing fast. But the 401(k) system is a blight on the face of the American republic. This set of tax subsidies (together with a few other similar programs) is supposed to enable people to invest for retirement, but as a new report from the Economic Policy Institute shows in crushing detail, it's failing in every conceivable way.

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Barely over half of families have any sort of account at all, and most of those that do have a pitifully inadequate sum saved up. The median balance among all families is a piddling $5,000, but even among families whose head of household is 56 to 61 years old, the figure is a mere $17,000. Millions of people are about to reach retirement age with maybe half a year's income saved up, and millions more have nothing whatsoever.

With a bit of thought, it's obvious why 401(k)s were doomed to fail. First, as with any retirement scheme that requires individual contributions, it's a logical necessity for people to actually have income to spare. Given the long-term stagnation of median wages — or even decline among some demographic groups — this is obviously impossible for a great many people, who will generally need retirement help the most. This is clearly evidenced by people who have been doing the "right" thing, socking money away, but then hit a run of bad luck and are forced to withdraw early at the cost of stiff tax penalties. During the depths of the recession in 2010, some 9.3 percent of such savers had to resort to this.

There is a deeper problem here, however. At a theoretical level, the general population cannot simply save whatever amount they want, because their jobs and incomes depend on spending. A drastic enough increase in society's saving rates would simply cause overall incomes to decline. As John Maynard Keynes wrote:

It's not just unfair and ineffective for all people to provide for their own retirement by saving, it might even be mechanically impossible!

Second, 401(k)s are shot through with classism. Working class and poor people are much less likely to be able to negotiate the stress and mind-crushing complexity of the average mutual fund packet — or as with for-profit universities, to fall victim to swindlers heavily marketing themselves as financial advisers.

This hits blacks and Latinos especially hard, because they are disproportionately lower class. The vast majority of black and brown families have no such retirement account, and those that do have a median balance of $22,000, less than one-third the white median of $73,000.

In fact, the 401(k) system basically only works for the rich, who don't need the help. The top income quintile is 10 times as likely as the bottom one to have a retirement account, and they have vastly more saved up. It's not remotely surprising that this group claims some 70 percent of the overall tax benefits of 401(k)s.

Social Security, by contrast, helps the poor and minorities disproportionately. (Defined benefit pensions do as well, but they are vanishing fast.) It turns out that simple, universal, automatic-enrollment programs that don't have inch-thick contracts or platoons of grifters swarming all over them are better for ordinary schlubs. And because any increase in benefits would likely be financed mostly by the rich (uncapping the payroll tax, for example), who have a lesser propensity to consume, more Social Security could sidestep any potential paradox of thrift as outlined above.

Social Security is one of the finest government programs in American history. It works great, and has always worked great — it just doesn't pay enough to keep the upcoming generation of retirees out of poverty. But that's just a matter of twiddling the benefit knob up a couple notches. It's time to scrap the rancid 401(k) system, and strengthen Social Security with a big new infusion of tax money.