The Overlooked Truths of US Retirement Accounts
Nearly half a century ago, on Labor Day 1974, President Gerald Ford signed the Employee Retirement Income Security Act. The bill created Individual Retirement Accounts (IRAs) and essentially paved the way for 401(k)s, 403(b)s, and a host of imitations.
Retirement experts have been beating up on the accounts ever since. Two fresh examples aim specifically at 401(k)s, easily the most common of the type.
One was an in-depth article asking a serious question, “Was the 401(k) a Mistake?” The answer, equally serious, was an emphatic “yes”. By coincidence, the second critique also asked a serious question and delivered a “yes” answer: “Should Your 401(k) Be Eliminated to Save Social Security Benefits?”
The primary fault of 401(k)s and all comparable accounts—undeniable fifty years ago and undeniable today—is that they simply can’t compare to pensions. Employers put up the money for pensions, investing it on behalf of their workers. The workers collect when they retire, getting fixed monthly amounts (and often cost-of-living increases as well) for the rest of their lives.
At some point those workers will also be drawing Social Security, so they’ll be savoring financial double-dips for all of their later years.
Retirement plans are almost the exact opposite of pensions. Workers put up their own money (though employers, especially in more recent years, have kicked in something as well). There are no guaranteed monthly returns down the road. There’s actually no guaranteed anything: the value of the accounts goes up one day and down the next, and where it ends nobody knows.
No wonder, then, that retirement experts have never been fans of IRAs, 401(k)s and the like. And yet, and yet: maybe the picture isn’t quite as bleak as it’s long been painted.
Maybe the bill that President Ford signed 50 years ago deserves to be called “the most important piece of retirement legislation” in American history.
Just for a change, let’s look at the bright side (and maybe the right side?) of retirement accounts. How they perform will hugely impact the coming decades for tens of millions of workers—and their spouses, children and grandchildren as well.
To begin at the beginning, President Ford and Congress had their heads and their hearts in the right place when they first created retirement accounts. It’s true that what they created would never provide the security of pensions—but most workers didn’t have pensions, and never would have.
Retirement accounts, though, gave them a vehicle they never had before: an easy way to invest, an easy way to create their own personal supplement to Social Security.
The accounts also came with a tax break that pensions never offered to workers. Account holders pay no taxes on any of the money they put into the accounts, or on any of the gains, until they begin withdrawals. The timetable for withdrawals would later get bonus tax breaks as well. The starting age has always been 59 ½, but the age for mandatory withdrawals has been pushed back twice. It’s now 73, headed toward 75 in 2033.
(Roth accounts are an outlier: contributions are taxed, but withdrawals are tax-free and there’s no mandatory withdrawal during the owner’s lifetime.)
From a modest beginning, retirement tax breaks have grown to become the biggest tax favor of all. According to the Joint Committee on Taxation, they’ll cost $251.4 billion in fiscal year 2024. That’s $251.4 billion that doesn’t go to the Treasury, that stays instead in the pockets of taxpayers. Admittedly, those breaks heavily favor America’s high-, higher- and highest-income workers. (So do pensions, government and private industry alike.)
The fate of retirement accounts is directly linked to the stock market, and the link could hardly have been more rewarding. Of course, there are bad times; as recently as 2022, all the major indexes suffered huge losses.
But the market has always come back. This May 17th, for the first time in its 139-year history, the Dow Jones Industrial Average topped 40,000. There’s a pass-along plus too; unlike pensions, retirement accounts can be left to any generation.
Wall Street’s performance underlines a notable about-face by Alicia H. Munnell, a prominent retirement expert. Ms. Munnell heads the Center for Retirement Research at Boston College. She once believed that pensions outperformed 401(k)s—until the Center’s own research proved otherwise.
Asset accumulation, though, is just one measure of retirement plans. Ms. Munnell remains a critic: she co-authored the paper, mentioned earlier, that proposes scrapping 401(k)s to save Social Security.
For the final words on America’s 50-year-old retirement plans, let’s go back roughly 250 years to the French philosopher Voltaire. To paraphrase, never let the perfect (pensions) be the enemy of the good (IRAs and all their brethren).
• This article originally appeared in The New York Daily News
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