Was the 401(k) a Mistake?

nytimes.com

3 points·throw0101d··3 comments

Was the tax code a mistake? No. Was it a mistake to replace pensions with 401(k) accounts? Absolutely.

A pension fund has one primary benefit: it distributes funds from those in the pension fund who contributed but died early to those who live a longer life, ensuring that all pensioners receive a steady income through end of life.

A 401(k) is just an investment account with strict rules (and in many cases, poor investment choices and high fees). In a middle class life at the average American salary (which is less than $60k!), is it even possible to invest enough to support a steady income that allows you to live to be 100? I think the answer is no, even if you follow the conventional rules of saving 10% of income and re-allocating into lower-risk investments as you age.

The loss of the defined-benefit pension is a tremendous blow to Gen X and beyond, and we are going to feel that impact very very hard in American society in around 20 years.

Pensions insure longevity risk, as you say, but people can create their own pensions to supplement Social Security by using their 401(k) funds at retirement to buy immediate annuities that offer monthly payments for life. Few do.

https://archive.today/hJD7G

https://archive.ph/hJD7G

Also, NYT podcast episode (30m):

* https://www.nytimes.com/2024/05/20/podcasts/the-daily/401k-r...

* https://www.youtube.com/watch?v=HV9cUhQQ6ek (audio-only)

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