Send a Tweet
Most Popular Choices
Share on Facebook Share on Twitter Share on LinkedIn Share on Reddit Tell A Friend Printer Friendly Page Save As Favorite View Favorites
OpEdNews Op Eds

Magic money working magic on 401(k)s

By   Follow Me on Twitter     Message Gerald Scorse       (Page 1 of 1 pages)     Permalink    (# of views)   1 comment

Related Topic(s): ; ; ; ; ; ; ; , Add Tags
Add to My Group(s)

View Ratings | Rate It

opednews.com

Author 500743
- Advertisement -

A top policy expert isn't buying reports of a private-sector retirement "crisis." In an article, Andrew Biggs not only rejected the gloom but offered a striking counter-narrative. He cited figures showing that 401(k) defined contribution accounts, while regularly maligned, are doing better by workers than the defined benefit plans they swept aside.

His numbers speak to the power of magic money: savings built up in large part by stock market investments, compounded by decades of tax-sheltered capital gains and dividends. The most fortunate retirees are having their cake and eating it too. They're taking annual distributions from their accounts, and having the withdrawals more than replaced by new magic money streaming in (full disclosure: the author is among the most fortunate).

Let's review some of the key figures, and see how 401(k)s and similar defined contribution accounts are making the golden years more golden for millions of retirees.

First, defined contribution plans cover a far greater proportion of workers. "Participation is higher in 401(k)s, with 61 percent of private sector workers participating according to a Social Security Administration analysis, versus a peak of 39 percent for defined benefit plans." The percentages underscore a truth commonly ignored by defined benefit advocates: the vast majority of non-government workers never had such plans, and likely never would.

- Advertisement -

Current retirement savings also far exceed the comparable figures for the years when only traditional pensions existed. Federal Reserve data show that total savings in employer-sponsored plans rose from 27 percent of gross domestic product (GDP) in 1947 to a peak of 57 percent in 1975. But, Biggs points out, "in the four decades since 401(k)s were introduced, total retirement savings nearly tripled to 157 percent of GDP."

Other yardsticks yield equally compelling results (thanks partly, of course, to magic money).

For example, a 2017 study by economists from the IRS and the Investment Company Institute put the income of the median retiree at 103 percent of what they were making prior to retirement, "far exceeding the 70 percent 'replacement rate' that most financial advisors recommend."

- Advertisement -

Workers appear to be getting a better deal even without any magic. Vesting periods are shorter, and company contributions have soared; according to the Labor Department, employer deposits to private-sector plans "more than tripled as a percentage of salaries since 1975."

With so many signs flashing positives, why all the negatives for 401(k)s? Why are they disparaged as a backward step?

There's good reason. Defined contribution plans effectively lift the pension burden from employers and put it on employees instead. They offer little to no security. The stock market, where most 401(k) money heads, is notoriously volatile. Inevitably, unnervingly, Wall Street hits stretches when the averages slide deep into the red.

But there's an inverse inevitability as well, and it gets little mention: the inevitability of market recoveries, often speedy recoveries.

MarketWatch analyzed selloffs and recoveries from 2010 to September 2015. The declines averaged 26 trading days to bottom out, an equal 26 days to recover; the median did even better, recovering from a 19-day drop in just 15 days. Wealthfront looked at down markets from 1965-2014; over those fifty years, all the declines of less than 10 percent "bounced almost instantly."

Uber-crashes are inevitable too. In the latest, from June 2008 to March 2009, the financial crisis took all three major indices to 12-year lows. Then began the recovery: the S&P 500 finished 2009 up 64.83 percent from its low, the NASDAQ up 78.87 percent, the Dow-Jones 59.28 percent. As it happens, the rebound was also the start of what's become the second-longest bull market in the last 85 years.

- Advertisement -

There are two morals to this retirement story. First, based on the record, defined contribution accounts deserve more cheers than jeers. Second, magic money really is working magic, enriching both current and future retirees.

Over the long run it'll do lots more enriching. It's almost, well, inevitable.

(Article changed on August 12, 2017 at 21:25)

 

- Advertisement -

View Ratings | Rate It

opednews.com

Gerald E. Scorse is a freelance writer living in New York. His op-eds have appeared in newspapers across the United States

Share on Google Plus Submit to Twitter Add this Page to Facebook! Share on LinkedIn Pin It! Add this Page to Fark! Submit to Reddit Submit to Stumble Upon Share Author on Social Media   Go To Commenting

The views expressed herein are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Writers Guidelines

Contact AuthorContact Author Contact EditorContact Editor Author PageView Authors' Articles

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

What Donald Trump did to me

One Tax Policy Americans "Yugely" Favor

The book that uncovered 'wealthfare'

Dad's Turn to Do the Family Planning

One tiny tax reform, billions for America

Making the golden years golden for all Americans