McArdle Advocates Paternalism
By David Henderson
And it’s expensive paternalism.
Megan McArdle of Bloomberg, who is normally a first-rate analyst of economic issues, has written an inaccurate attack on 401(k) plans and, worse, proposes a huge paternalistic government program for retirement in her column “The 401(k) Problem We Refuse to Solve.”
“The great lie is that the 401(k) was capable of replacing the old system of pensions,” former American Society of Pension Actuaries head Gerald Facciani told the Journal. “It was oversold.”
This is true.
No it’s not.
What’s her basis for thinking this charge is true? Is it that people who, with their employers, sock away 10 to 15% of their annual income in diversified investments don’t do well? No.
Just before this negative conclusion about 401(k)s, she gives her reasons, writing:
Investment returns have proven variable, and individuals are often prone to making idiotic mistakes (like selling everything when the market crashes, which is literally the worst possible time to do so). And that’s only for people who have a 401(k); many people decline to participate in a plan, even when their employer offers matching grants. And according to the Wall Street Journal, the early boosters are turning sour on the whole idea.
Let’s look at those charges one by one.
Investment returns have proven variable.
That’s true. That’s why it’s important to diversify: to have stock index funds that buy U.S. stocks, such as the Vanguard Total Market Index, but also to have index funds in foreign funds, and some bonds. That’s hardly a mark against 401(k)s.
[I]ndividuals are often prone to making idiotic mistakes (like selling everything when the market crashes, which is literally the worst possible time to do so).
That’s true. But this isn’t an argument against 401(k)s. Rather, it’s an argument for managing one’s 401(k) wisely.
And that’s only for people who have a 401(k); many people decline to participate in a plan, even when their employer offers matching grants.
That’s true too, and it is generally a really bad idea not to invest when one’s employer offers a match. But this is the strangest charge of all. 401(k)s are oversold because people don’t use them? If people aren’t using them, wouldn’t a reasonable reaction be that they are undersold?
And according to the Wall Street Journal, the early boosters are turning sour on the whole idea.
They are. But a look at the WSJ article she links to shows why: people are generally saving way too little in their plans, assuming that their goal is to use 401(k)s as a major part of their retirement income, and often paying exorbitant fees.
There’s a relatively easy fix for employers: choose plans that don’t have high fees. And there’s a relatively easy fix for employees: save more.
Now, you might say that this last fix isn’t easy. And, for many people, that’s probably right.
But what does McArdle suggest: A huge government intrusion to make people save. If you don’t like my fix because it’s not easy, then you should dislike her fix even more because she would force people into it.
The funny thing is that, for all the people arguing that some dire problem in one of these three retirement systems [defined benefit plans, define contribution plans (like 401(k)s, and Ponzi-style–the polite term is pay-as-you-go–“social insurance” schemes] urgently requires that we switch to another kind at once, the major problem with all three is exactly the same. It’s even a problem that’s easy to state and easy to fix — no need for extensive blue-ribbon commissions or elaborate white papers. Here’s the solution: Pick whichever system you prefer; it really doesn’t matter. Now slap a 10 to 15 percent surcharge on a worker’s wage income, and divert that money into the system for the worker’s future use. Problem basically solved, because in all three cases, the only flaw that actually matters is that they’re badly underfunded.
A 10% to 15% surcharge is huge. There’s another solution, although unraveling our current Social Security Ponzi scheme makes it hard: Let people make their own decisions. Will many of them make bad decisions? Based on what McArdle reports about 401(k) experience, yes. But then don’t blame it on 401(k)s. Put the responsibility where it lies: with the decider.
Moreover, if she’s saying that it doesn’t matter which of the three systems one chooses, then she’s saying that one of the systems, Social Security, is fine as long as the government forces people to save 10 to 15% of their income in it. But the government does that now. The combined employer and employee FICA tax is now 12.4% of all “earned” income up to $127,200 (in 2017). 12.4% is almost exactly midway between her bounds of 10 and 15. Which means that McArdle, by her own reasoning, should be claiming that Social Security is working just fine. But she’s not. She’s claiming that most people covered by Social Security haven’t saved enough on top of Social Security.
Back to her 10 to 15% surcharge. Think what that would do to a young person who’s trying to save money to buy a house or condo. That would make it much harder. It would also prevent the person from doing a more life-cycle approach to retirement saving: saving a few percent of income from his late 20s to his mid-30s, then saving a higher percent from his late 30s to his mid 40s, then saving a larger percent from his late 40s to retirement in his 60s. What did I just describe? My saving behavior with my 401(k).
Coerced one-size-fits-all solutions don’t fit all. Normally, Megan McArdle recognizes that. In this case, she didn’t.