The overlooked truths of retirement accounts

Nearly half a century ago, on Labor Day 1974, President Gerald Ford signed The Law on Insurance of Employees’ Pension Income. The bill created Individual Retirement Accounts (IRAs) and essentially paved the way for 401(k)s, 403(b)s, and a host of imitations.

Pensions experts have been hammering away at the calculations ever since. Two fresh examples specifically target 401(k)s, easily the most common of the kind.

One was an in-depth article that required a serious question, “Was the 401(k) a mistake?” The answer, just as seriously, was a resounding yes. Incidentally, the second criticism also required a serious one question and gave a yes answer: “Should your 401(k) be eliminated to save Social Security benefits?”

The main fault with 401(k)s and all comparable accounts—undeniable fifty years ago and undeniable today—is that they simply cannot compare to pensions. Employers put money into pensions, investing them on behalf of their employees. Workers collect when they retire, receiving fixed monthly amounts (and often increased living costs) for the rest of their lives.

At some point those workers will also draw Social Security, so they’ll enjoy double financial cuts for all their later years.

Retirement plans are almost the opposite of pensions. Workers put up their own money (although employers, especially in recent years, have started something too). There are no guaranteed monthly returns on the road. Nothing is really guaranteed: the value of accounts goes up one day and down the next, and where it ends nobody knows.

No wonder, then, that retirement experts have never been fans of IRAs, 401(k)s, and the like. And yet, and yet: perhaps the picture is not as bleak as it has long been painted.

Perhaps the bill President Ford signed 50 years ago deserves to be CALLED “the most important piece of retirement legislation” in American history.

Just for a change, let’s look at the bright side (and maybe the right side?) of retirement accounts. How they perform will have a huge impact for decades to come for tens of millions of workers—and their spouses, children, and grandchildren, too.

To begin with, President Ford and Congress had their heads and hearts in the right place when they first created retirement accounts. It is true that what they created would never provide pension security—but most workers there were no pensions and there never would be.

Retirement accounts, however, gave them a vehicle they never had before: an easy way to invest, an easy way to build up their own personal Social Security supplement.

The accounts also came with a tax break that pensions were never offered to workers. Account holders do not pay taxes on any of the money they put into the account, or on any of the earnings, until withdrawals begin. Scheduled withdrawals will also receive bonus tax breaks later. The starting age has always been 59 ½, but the compulsory retirement age has been pushed back twice. It is now 73 directed to 75 in 2033.

(Roth accounts are unusual: contributions are taxed, but withdrawals are tax-free, and there are no mandatory withdrawals during the owner’s lifetime.)

From humble beginnings, superannuation tax breaks have grown to become the biggest tax favor of all. According to the Joint Committee on Taxation, they will cost $251.4 billion dollars in the fiscal year 2024. There are 251.4 billion dollars that do not go to the Treasury, but remain in the pockets of taxpayers. Undoubtedly, these holidays heavily favor America’s top, top, and top earners. (So ​​are pensions, government and private industry.)

The fate of retirement accounts is directly tied to the stock market, and the connection could hardly be more rewarding. Of course there are bad times; by 2022, all major indexes suffered heavy losses.

But the market has always turned. On May 17, for the first time in its 139-year history, the Dow Jones Industrial Average reached 40,000. There is also a plus plus; unlike pensions, retirement accounts can be left to any generation.

Wall Street’s performance highlights a notable face from Alicia H. Munnell, a prominent retirement expert. mrs. Munnell directs the Center for Retirement Research at Boston College. She once believed that pensions trumped 401(k)s all the way to the Center itself explorative proved otherwise.

Asset accumulation, however, is only one measure of retirement planning. mrs. Munnell remains a critic: she co-authored the paper, mentioned earlier, that proposes eliminating the 401(k) to save Social Security.

For the final words on America’s 50-year retirement plans, let’s go back roughly 250 years to the French philosopher Voltaire. To paraphrase, never let the perfect (pensions) be the enemy of the good (IRAs and all their brethren).

This article first appeared in the New York Daily News.