By Don Surber
As a person of modest means now comfortably retired, I was amused by the call to have the Social Security Administration take over the 401K program, as put forth in the Wall Street Journal on January 2 in a Marketing section article, “The Champions of the 401(k) Lament the Revolution They Started.”
I realize the experts told reporter Timothy W. Martin that Social Security should take over 401(k) plans, but if an expert told me such foolishness, I would seek another expert.
My experience is there is nothing wrong with the 401(k) program.
The 401(k) was a private industry solution to providing pensions without bankrupting companies. The program has helped millions of people like me to benefit directly from the stock market’s incredible rise since Reagan became president.
Employees squirrel away some pre-tax money in a savings plan, which employers match. The money is invested in mutual funds. Then at 59½, they can start drawing money down. As the article noted, Ted Benna, a benefits counselor at the Johnson Companies in Pennsylvania, helped pioneer this program in 1980. Benna retired ten years later at age 49.
I am not so sure he laments the revolution. His one regret, according the article, was, “I helped open the door for Wall Street to make even more money than they were already making.”
Truly, I hope he meant that in jest because those fees paid off for me and millions of others. Roughly $5 trillion is kept in 401(k) accounts with another $2 trillion kept in other defined contribution plans, according to the Investment Company Institute.
That $7 trillion dwarfs the $2.8 trillion Social Security has in its reserves. Social Security averages three percent interest on its money.
The Dow Jones Industrial Average rose ten percent last year. Yes, the stock market goes up and down. In the last sixteen years, it rose seventy-one percent – and those years covered two recessions and 9/11.
Nevertheless, big-government economist Teresa Ghilarducci wants the government to take over 401(k).
“Eight states, including Illinois, Massachusetts and California, have plans to set up their own programs for the uncovered that will offer guaranteed returns and provide incentives for small businesses to create accounts for people who don’t have them. Dozens more are exploring the idea,” Martin’s article said.
Excuse me, but the states entering the 401(k) business already manage their pension plans, and they are doing a lousy job of it.
“If the Actuarial Standards Board enacts recommendations from its Pension Task Force, actuarial valuations for state and local government pensions will report unfunded liabilities of over $5 trillion and funding ratios of just 39 percent. The public pensions industry will hate it, but those figures are the best available measures of the costs of public employee retirement plans,” Andrew Briggs reported in Forbes on July 1.
By definition, defined contribution programs are fully funded. They work just fine. This was a success without the government controlling the money. Nevertheless, the push for a government takeover moves on.
“Some initial believers in the 401(k) think those measures don’t go far enough. Ms. Ghilarducci wants to ditch the 401(k) altogether. She and Blackstone Group President Tony James are recommending a mandated, government-run savings system that would be administered by the Social Security Administration and managed by investment professionals. While both are Democrats, they believe their solution has bipartisan appeal.”
Mandate savings? Oh please, let us not turn 401(k) into Obamacare. And of course, Social Security is mandated as well.
The 401(k) is doing fine. The only problem is it is underutilized.
“Ms. Ghilarducci says she came to realize the 401(k) math she used in the 1980s and 1990s no longer works. The seven percent annual compounded investing returns, a pillar of the concept, now seems too rosy. She now believes setting aside three percent of salary isn’t enough,” Martin wrote.
Where did she get that three percent number?
Back in 1986 when I entered 401(k) land, my employer suggested six percent and matched it with another three percent. I thought this was the industry standard.That nine percent is less than the 12.4 percent of my pay the government mandated my employer and I pay. I bet on the stock market. The Dow Jones Industrial Average was around 1,800 back then. I figured I would be set if the Dow hit 10,000 by the time I retired.
It stood at 16,058 on the day I retired, twenty-nine years later. This enabled me to draw down more money from my 401(k) than I received from Social Security, which I had paid into for forty-six years.
Along the way, I ignored the commandment from experts to never borrow against a 401(k). I paid off a credit card and paid myself back at six percent interest. This not only cut my interest by two-thirds, but helped my credit score. Your results may vary.
If I invested in T-bills like some of my colleagues did when our employer began the program, I would have to find work today. Given that it was eighteen degrees this morning, no thank you.
By the way, I am not alone. I have relatives who made even less than I did who have retired comfortably. Their 401(k) plans served them well. Capitalism rocks.
Placing the 401(k) in the hands of government reminds me of an episode of the Little Rascals, Two Too Young. Porky and Buckwheat brought firecrackers to school. Spanky and Alfalfa dressed up as a G-Man and confiscated them to protect the younger boys. Alfalfa put the firecrackers in his back pocket and went to class.
In class, he gave a dramatic reading. As he recited The Charge of the Light Brigade, Porky and Buckwheat used a magnifying glass to ignite the firecrackers.
“Cannon to right of them.”
POW, POW, POW.
No, I do not need Alfalfa or the government managing my 401(k).
Don Surber is a retired newspaperman living in Poca, West Virginia. In July, he published Trump the Press on Amazon, a look at how the experts got the Republican nomination wrong. He will soon publish Trump the Establishment, a sequel on the general election.