You can’t make America great without killing the 401(k) and bringing back real pensions

A wonky fight brewing over specific rules of the 401(k) system is a shiny distraction from the real action on retirement security.

(Getty / Edit by Diana Ofosu)
(Getty / Edit by Diana Ofosu)

President Donald Trump is picking a fight with congressional Republicans over how 401(k) contributions will be treated in tax cut proposals currently winding their way through either end of the Capitol.

While his lawmaker buddies want to drastically shrink how much a person can put into their individual retirement account each year, Trump is tweeting promises not to allow any such contraction in contribution limits. If the president wins this fight with his own party, he’ll likely get lauded in the mainstream press for sheltering the most well-known form of retirement saving from what looks, at a glance, like a hard-hearted policy.

But zeroing in on Trump’s sparring with his colleagues misses the larger point of the nation’s retirement crisis. The blooming fight over the specific rules governing 401(k) savings mechanisms is an act of political sleight-of-hand. The mechanism itself is toxic to working-class economic security. If policymakers are truly interested in “fixing” the 401(k) system – unlikely, as Republican lawmakers are mostly worried about balancing out the cost of their preferred policy of giving rich people more money so that their tax bill won’t look like the debt-hemmorhage it is – their path is far simpler: Kill the 401(k) and bring back the traditional pension.

While retirement savings crises and their policy remedies are treated as a wonky, jumbled thing in most media coverage, the core story of what’s happened to working people’s ability to retire is simple. This is what kleptocracy looks like:

Financial progress goes “whoops”

The 401(k) was a freak accident, not a thoughtful act of statecraft. If you’ve ever wondered why something so important and common was given such a weird name, know that none of this happened on purpose at first. The 401(k) retirement system was a literal mistake, named for the obscure tax code foible that one single creative accountant identified as an opportunity to hide savings from the tax man back in 1980. Even the investment advisers who pimped the tax-hack back then now say it’s proven a wretched error — and one of those advisers, Herbert Whitehouse, told Slate this year that he won’t be able to retire until his mid-70s thanks to the changes in the system he helped usher to predominance.


Up until the Reagan ’80s, traditional pensions with guaranteed benefit levels were the dominant tool for providing workers with future security. For the first three decades of the Cold War, the share of workers with access to a traditional pension plan expanded steadily. But from 1985 to the beginning of the Great Recession, U.S. companies eliminated a combined 84,350 separate pension-based retirement systems for workers. The reversal exactly mirrors the rise of 401(k)s and other tax-code-based vehicles by which individuals save and invest rather than accruing a guaranteed retirement income for years of service.

The results of this shift have been dramatic, and deadly. Americans collectively face a multi-trillion-dollar shortfall in retirement saving. Analysts pegged the shortfall at $6.6 trillion in 2013 and $7.7 trillion in 2015. Whatever the correct figure, U.S. workers need to come up with an impossible sum or face harsh declines in post-work quality of life. Some people’s standard of living will decline so steeply that it will mean they will die earlier than they would have if they could afford adequate food, fresh air, and health care.

As Baby Boomers start to age out of the workforce, the consequences of all this are becoming clear: Extreme poverty among women older than 65 spiked by 18 percent from 2011 to 2012. Overall poverty rates for senior women living alone have only barely ticked back downward in the years since, even as the broader economy slowly recovered from the Great Recession. Roughly 1.6 million elderly women live alone and in poverty — a larger population than every person living in Philadelphia combined. It isn’t just women, either — the shift from guaranteed pensions to you’re-on-you’re-own savings vehicles helped drive the U.S. economy back into its new gilded age of hyper-inequality across the board.

A preventable tragedy

Like many tragedies, this one was preventable. The defined-benefit pension system, which evaporated under the market forces unleashed by the accidental discovery of the 401(k) system, was built to ensure people never slid into poverty in their old age after working their way up to a secure existence before retirement. It set a structural requirement on for-profit companies to shunt off a certain share of their revenue to the workers who made their success possible, long after they stopped coming in to work every day.


With that infrastructure of equality kicked out of the way by 401(k)’s rise, the people in the executive suites of America went ever further. The share of the U.S. economy that goes to workers shrank as corporations redirected as much revenue as possible to profits, shareholders, and executives — often while being incentivized to do so by Congress, who made executive bonuses and stock maneuvers advantageous for corporate tax avoidance.

Congress also encouraged wages to stagnate, in part by failing to ensure the minimum wage kept pace with inflation — a choice that allowed the nation’s economic floor to sag lower across the board. With less money coming in and the cost of living still rising, American families also found themselves promised a lifeline in the form of consumer credit. More and more household purchases shifted from cash to debt instruments — and at the exact same time higher education, once treated as a quasi-public good that should be low-cost to every family’s kids, also became a matter of borrowing huge sums and repaying them very slowly at high interest rates.

To conservative and neoliberal eyes, these changes amount simply to the natural progression of capitalism. Supporters of the 401(k) system argue that their accidental discovery was perfectly suited to the modernizing, globalizing, increasingly fast-paced economy. Workers didn’t stay in one job for thirty years anymore, so of course employers shouldn’t have to plan for paying them for decades after retirement — and the 401(k) is comparatively nimble, traveling with a person as they move between jobs. No longer an anchor of stability, pensions were derided as a ball and chain that restricted human freedom.

Yet even this vaunted portability of 401(k)s for workers who change employers more often in the modern economy than their parents did turns out, in some ways, to be a lie. Corporations can change retirement benefits at their leisure in an economy where almost no one has the protection of a union. Many use this liberty to punish workers who leave. The system of transferring a retirement account from one job to the next is cludgy at best, and outright confounding at worst.

All the while, the rules governing the system allowed or even encouraged quiet swindling by the financial industry professionals to whom workers must now entrust their futures. When policy researchers set out to gauge just how much advisers are able to skim off of a given worker’s portfolio — looking, again, only at those who actually are able to access the 401(k) system that shuts out so many poor and minority families — their findings were staggering. IRAs and 401(k) accounts allow the suits to charge fees four or five times higher than those associated with simple mutual funds. The difference clocks in between $71,000 and $94,000 in higher fees for the median American worker from a 401(k) than from a mutual fund.


If people knew they’re giving up as much as a third of their investment haul by using the 401(k) system, some might still opt to play the risk-reward odds and hope for a higher net savings from the steeper system. But they don’t know, generally. Proposals to force financial products to carry simple labels modeled off of nutrition facts boxes on food products could fix that informational asymmetry between workers and advisers, but only the return of real defined-benefit pensions would erase the problem entirely. Yet the labeling idea never even made it as far as proposals to require retirement advisers to always work in their clients’ best interests rather than their own — the idea behind the so-called “fiduciary rule” that the Trump administration is eager to kill before it takes full effect.

The broader anti-worker swindle

Over the same span where corporate and government policy shifts undermined their economic future, working people saw their financial present torn up by other conservative policies — with help, all too often, from nominal Democrats who had bought into the Reagan-era vision of capitalist benevolence.

After World War II, in the heart of the era to which Trump’s political brand hearkens back, payroll taxes on workers and employers provided about one dollar of every nine the government collected. Corporate taxes contributed more than one dollar in four to federal coffers. By the height of the Great Recession, those proportions had more than flipped. As the government made it easier and easier for corporations to avoid tax, workers made up the difference — causing payroll taxes to rise to 36 percent and corporate taxes to fall to 12 percent of annual federal collection in 2008. The inversion of the pink and green wedges in the chart at right is the public policy equivalent of deciding to stop buying live mice for your pet snake and instead feeding it pieces of your own fingers.

CREDIT: TalkingPointsMemo
CREDIT: TalkingPointsMemo

The chart at right is now six years old, but the transfer of cost burdens it shows from companies to workers has only continued since – as shown by the inverse trends of the yellow and dark-blue lines at the far right-hand side of this wonkier graphic from the Tax Policy Center.

The hollowing out of working class retirement security is one of the great policy scandals of the past half-century. It got significant attention from well-meaning wonks during the Obama years, one of several broader economic justice questions thrust forward by the sheer magnitude of the harm caused by Wall Street’s sabotage of the world economy.

But even then, the progressive political world turned not to the ambitious task of reviving the corpse of the old pension system, but to a cut-the-baby-in-half approach. Obama’s signature retirement policy proposal, called “myRA,” did not tackle the economic violence of allowing the politics of personal responsibility to overtake the idea that a lifetime of work ought to guarantee security through the golden years of life. Instead, it sought to bring in those currently shut out of the 401(k) system into its machinery — to either navigate its risks or get mashed in its gears like the supposedly lucky half of the workforce that already has access to a savings system through their job.