Friends often ask me when I plan to retire. My response is, in 6 years—or perhaps 16 years.
That’s because I and hundreds of millions of my fellow citizens now live in what Thomas Friedman refers to as a “401(k) world.”
For Friedman, it’s a world of individual promise:
We now live in a 401(k) world — a world of defined contributions, not defined benefits — where everyone needs to pass the bar exam and no one can escape the most e-mailed list. . .
If you are self-motivated, wow, this world is tailored for you. The boundaries are all gone. . .Your specific contribution will define your specific benefits much more.
But for the rest of us, the 401(k) world—a world of defined contributions retirement programs, instead of defined benefits—is just a giant scam in which employers have managed to shift all the risk of saving for retirement onto their employees and the financial industry captures a new set of fees. Sure, employers (some of them at least) have to distribute some of their gross profits to their employees’ retirement accounts, and the employees have to come up with another portion out of their wages and salaries. But the risk is all with the employees, since their actual retirement savings depends on what happens in equity and bond markets. Once their initial contributions have been made, employers no longer have to worry about coming up with the funds to keep pensions fully vested. All the risk falls on the employees—and the gains accrue to the lucrative area of managing both employer-mandated and 401(k) retirement accounts.
Matt Yglesias has some sense of what’s going on:
the problem with living in a 401(k) world is that Planet 401(k) is a pretty sucky planet. Here’s the essential shape of 401(k) as a backbone of the retirement system:
— Poor people get absolutely nothing.
— Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect
— For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words, it’s inverse to need.
— A small minority of middle-class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee, broadly diversified fund as their savings vehicle.
— Most middle-class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.
— A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle-class mass market based on their ability to swindle people.
Felix Salmon has an even clearer view of what’s going on:
a 401(k) plan is an icon of futility and the way in which the owners of capital extract rents from the owners of labor. . .the 401(k) is a way for both your government and your employer to disown you, and to leave your life savings to be raided by the financial-services industry and its plethora of hidden and invidious fees.
All of which means, in a 401(k) world, employers and banks are making out like bandits, while the rest of us are forced to have the freedom to rely on whatever we can save for retirement, plus the vagaries of financial markets.
In Friedman’s world, we get what we deserve. In my world, I’ll be able to retire in 6—or 16—years.