What John Oliver gets wrong about 401(k)s

Retirement is a rough business in America. Our signature policy, the 401(k) retirement tax benefit, is a huge pain in the neck and riddled with corruption.

Liberals are endlessly discussing the problems with the system. Nevertheless, they have struggled to come up with a strong counter-narrative for how retirement should work. If we can ditch the idea that saving and investing are an inherent good, clear thinking about retirement — meaning an end to tax-advantaged retirement accounts — will be much easier.

John Oliver went through some of the problems with the 401(k) system recently, much of which he encountered while trying to set up a retirement plan for his own employees:

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In sum: Most actively-traded funds don't beat the market average, many investment products are marketed deceptively, and it's even legal for many hired financial advisers to trade against their own clients. (The exception is for a "fiduciary," a regulation Republicans in Congress are trying to overturn.) In the end, however, Oliver accepts the basic legitimacy of the 401(k) style of policy — a tax-advantaged account to incentivize private saving for retirement — even finishing his segment with a set of anodyne investment tips.

So why not just get rid of retirement tax benefits altogether and replace them with something better? Kevin Drum provides the missing argument, with a case in favor of 401(k)s. He says 1. contributions are tax-deferred; 2. they're portable from job to job; 3. they can pay out in a lump sum; 4. unlike Social Security, they're inheritable; and 5. they can smooth the transition to Social Security retirement age.

There are various counter-quibbles. A 401(k) account from an old job does not automatically fold into a new one, so if you change jobs a lot it's easy to accumulate a ton of extra accounts and corresponding massive logistical headaches. He doesn't address the utterly senseless employer "vest" system, and seems to have forgotten about Social Security Survivors' Benefits. Finally, it's hard to see why being "tax-deferred" counts for anything, since that's the definition of the policy rather than a point in its favor.

But there is a more fundamental case against the basic design of tax-advantaged retirement accounts, one that holds against all their various forms.

The point of retirement policy is to enable old people to live without working, which necessarily means taking economic production from the currently employed. Different programs have different strategies towards this end — Social Security simply takes from the currently working and gives to the retired, while retirement tax shelters are supposed to enable individuals to pile up financial claims that they can then exchange for goods and services after they stop working.

Conservatives and centrist liberals tend to favor the individual savings route, because it reinforces bourgeois ideology about responsibility and rugged individualism. If you have successfully navigated the hellish pit of despair that is American retirement policy and piled up enough financial claims to keep you alive until death, it's much easier to pretend that you alone are responsible for your retirement, despite the obvious fact that current workers still have to produce the goods and services you buy with that retirement hoard. Even Social Security is often characterized as a savings program instead of what it really is — a welfare program.

A retirement savings tax shelter like the 401(k) might make more sense if it was clear that the economy was short of capital — which would mean saving could enable more growth. But with interest rates at record lows — and indeed longstanding worries about a "global savings glut" leading to asset price bubbles — the opposite is the case.

So there is no inherent reason to favor individual investment accounts over any other retirement system, and 401(k)s and their ilk ought to be considered only in light of their usefulness for enabling actual old people to sit around baking cookies for their grandkids and such. And when one broadly examines various retirement tax benefits, two things are evident. One, they are failing miserably at their stated goal — most people near retirement have barely more than a pittance saved up. Two, these sort of tax benefits are horribly inefficient. Fully 70 percent of all the tax benefits produced by 401(k) system are claimed by the top income quintile.

That is the stone obvious consequence of any traditional tax break, since the more money you make, the more you pay in taxes. They automatically pay out inversely to need — and are thus a huge failed opportunity to distribute resources to people who actually need them.

One could argue about the best replacement for retirement tax shelters (personally, I'd scrap the 401(k) and similar policies, uncap the payroll tax, and plow the proceeds into Social Security). But the role of government ought to be to provide broad material security as far as practicable. A monstrously complicated and unfair savings incentive does not fit that bill, no matter how much it flatters traditional notions of middle-class virtue.