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The big lie of privatization. In theory, 401(k) accounts are supposed to turn working people into investors who own and oversee the management of their own retirement money. As an addendum to other forms of retirement savings, 401(k) accounts can be a great thing. But, in practice, for many Americans it doesn't always work out quite like the theory.

Later this year, when the big theme of Ownership is played out in the Bush campaign, it will be useful to remember that reality does not always mesh with employers' (and Republicans') glorious dream of employees who entirely fund their own retirements.

The 401(k) system that started out with good intentions is rapidly becoming a massive deflection of responsibility — because working people simply don't have as much money as their companies' owner-managers do (Houston Chronicle/WaPo):

Despite years of reasoning, wheedling and sermonizing from financial advisers and retirement planners, nearly half of all workers who change jobs cash out their 401(k) plan savings instead of leaving them to grow, either there or in some other form of tax-deferred account, according to a new study.

This behavior, at best, deprives workers of years of compounding, which can do miracles for even modest sums. At worst, it could undermine the entire premise of these “defined contribution” retirement plans, which is that a combination of worker prudence, employer assistance and tax benefits will enable workers to build up adequate nest eggs for their retirement years.

[..]

The study did not look at what workers did with cash when they took it, but Stacy Schaus, a consultant with Hewitt Associates, the benefits consulting firm that did the study, said anecdotal evidence suggests most of it went for such things as living expenses and credit card debt. Even if the job changers reinvested the money in a taxable account, they would have lost from taxes and penalties.

[...]

But the Hewitt study and others like it raise serious public policy questions. The Bush administration apparently has not given up on the idea of allowing almost everyone to fund large IRA-like accounts, notwithstanding the evidence that many workers have difficulty funding even small accounts. Such a proposal, while appealing to people with the wherewithal to save, could magnify a looming split in the retiree population between those with enough to live on and those without.

Judiciously applied, the 401(k) system makes a useful contribution to the ability of Americans to save, supplement, and oversee their own retirement money. But pushing the retirement privatization logic too far, as the Bush administration appears hell-bent on doing, demonstrates their deep-seated hostility to workers with lower compensation. With millions of jobs lost in just three years of the Bush administration, saving money — even tax-deferred money — is a luxury fewer Americans enjoy.

Here's the Hewitt press release for the study mentioned.

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