Defined-Contribution Retirement Plans are Terrible
The 401(k) often functions in practice as a way to funnel money from your employer directly to your fund manager. Furthermore, most Americans are woefully underinvested in their 401(k)s anyway. I love that the government subsidizes my retirement savings…but it changes my behavior exactly zero percent. I’d save the money anyway. This is almost certainly true of everyone who is not underinvesting for retirement – they save because they are conscientious, and so subsidizing them through the tax code is basically setting tax revenue on fire. The conscientious would save anyway, and the careless won’t save anyway. As we come to the first generation that is facing retirement without defined-benefit pensions, and relying on their defined-contribution retirement plans instead, it has become clear that the boomer generation is (collectively) massively underprepared for their retirements.
In short, the grand experiment in defined-contribution retirement plans has been a clear failure. Defined-benefit pensions may no longer be practical in a world of more transient careers, but we have failed to adequately replace them.
This is one good and oft-ignored reason to be pessimistic about the medium-term deficit. Many Boomers, without a pension to support them, will be more or less unable to retire. I expect benefits for Social Security to be increased, not cut as Republicans desire, as the plight of boomers becomes clear over the next decade or so. We will face a clear choice between letting boomers starve or adequately supporting them, and I’m optimistic about our desire to care for our parents. While liberals like to insist that Social Security is actuarially stable, and it is, this is an overly narrow view that neglects the greater real burden the Social Security system will have to bear in the decades ahead.