The 401(k) retirement plan has become an emblem of the Ownership Society. For the most part it’s an apt metaphor. It was created by accident, it gets more credit and blame than it’s earned, and thirty years later it remains more a concept than a deliberate policy.
The success of the 401(k) as an alternative to pension plans has been mixed at best, but it’s difficult to separate the problems of 401(k) savers from the wider issues affecting all retirement programs. Making individualized retirement actually work probably requires a new posture from government that we are unlikely to see without a major reshaping of the Republican Party.
In 1980, a suburban Philadelphia accountant named Ted Benna identified an unintended feature of the recently passed IRS Code section 401(k). The terms of the rule seemed to allow companies to create pre-tax retirement savings programs directed, owned, and controlled by employees. The IRS agreed with Benna’s interpretation. Thus began a lucrative new business and an accidental revolution in retirement finance.
There is deep insight in this nugget of historical arcana. First, the 401(k) was not part of any effort to kill the corporate pension. The shift toward individualized retirement was driven by ordinary people scrambling to cope with public policy choices that no longer made sense.
Secondly, when we look back in time we often tie social changes to politics without any real connection. Individualized retirement is seen as a symbol of the Reagan Era, but Reagan was not a fan (he favored conventional IRA’s). The Reagan Administration tried to eliminate the 401(k) “tax loophole” twice before giving up in the face of public resistance.
For thirty years Washington has been trying to catch up with Ted Benna and the growth of the Ownership Society. That’s the most important lesson for both Republicans and Democrats from the 401(k) story. The Ownership Society is already here. It happened. The tension and gridlock we see in Washington is the symptom of a political class that hasn’t yet awakened to a major cultural shift.
In 1980, stock ownership was an elite activity. Barely over 10% of Americans owned equities of any kind. After a peak in the last decade, still more than half of Americans own equities in some form. The 401(k) has played only a modest role in this phenomenon, alongside mutual funds, the decline of stock brokerage, and changes in employee compensation.
The rise in equity ownership is neither the only, nor the most important symbol of the emerging ownership culture. Almost 20% American workers are self-employed in one form or another, either as a classic small business or through a consulting arrangement. Adult white males, traditionally our most privileged demographic cohort, have been leaving the conventional workforce since the sixties. Mass employment is losing its role as the center of our economic universe.
Thanks to a vastly more dynamic work environment and the related growth of 401(k)’s, the percentage of American workers covered by a pension has dropped from 60% in 1980 to only 10% today. Democrats are crying that this constitutes a crisis. They point to a worrying gap in anticipated retirement income and blame the trend toward 401(k)’s.
They refuse to acknowledge that the retirement crisis is a far bigger issue affecting all forms of retirement saving. The same dynamics that are undermining the value of 401(k) plans are affecting pensions. The difference is that the individuals covered by a pension can’t do anything about it.
Individualized retirement saving has granted a large cohort of Americans an opportunity, through work and thrift, to steer around a wider problem affecting everyone. Democrats are nostalgic for the era of defined pensions while ignoring how badly it sucked.
Americans moved away from pensions because they were (and are) severely career limiting and unstable. Employees at Studebaker in 1963 found their retirement gutted by poor management, and their predicament has been repeated over and over again down through the decades. Yes, 401(k) savers sometimes fail to save enough or make poor choices, but they are less at the mercy of others’ misdeeds than those who can influence their own fate.
Corporations have dumped pensions primarily because the costs have become unsustainable. Look at the crisis in public sector pensions and the problem becomes obvious. There is no alternative to higher individual savings as a means of retirement finance. Pushing a shift back toward pensions means pushing the burden of retirement savings back onto taxpayers and creating stifling limits on the less fortunate who want to move up the economic ladder.
Instead of discouraging 401(k)’s or pushing companies back toward pensions, a few rules changes could make individual retirement more effective. Changing to an “opt-in” model, tightening limits on brokerage fees, withdrawals, and loans, and better education would help.
Our generation-long experiment with the 401(k) has taught us that government can become a facilitator for the ownership society or an impediment, but it cannot stop this transition. The posture of our government will only determine how broadly the benefits of this shift will be spread.
Our political system should be exploring ways to smooth and enable the transition toward individual retirement, rather than trying to constrain it. Washington did not create the ownership society, it does not understand it, and it cannot stop it. Our policy choices will only determine how many people get to benefit from this social and economic transformation, not whether it will occur.
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ABOUT THE AUTHOR: Chris Ladd is a Texan who is now living in the Chicago area. He is the founder of Building a Better GOP and has served for several years as a Republican Precinct Committeeman in DuPage County, IL, and was active in state and local Republican campaigns in Texas for many years. (Email: chrladd AT gmail DOT com)
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