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Market Losses Emphasize Need For Personal Savings

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The Tampa Tribune

Published: February 2, 2009

People angry and frightened that they've lost almost half their life savings in a year are calling the 401(K) retirement law a failed experiment that needs a risk-free, mandatory replacement. Some even want Congress to take emergency action to help workers refill their depleted accounts.

The economic downturn has revealed flaws in the tax-deferred savings system, but nothing has happened to discredit the basic act of saving. Congress shouldn't panic and make new promises it cannot deliver or new demands on workers that will raise taxes.

One radical plan being discussed would restore, through government loans, much of the money recently lost in 401(K) balances. The private accounts would be turned over to Social Security to administer.

In exchange, the owner of the account would get a 3 percent guaranteed return from the government, with payments to begin upon retirement.

If you were largely invested in stocks last year, you'd be tempted to go along with any plan that covers your loss with someone else's money. If you had your 401(K) in safe, low-yield investments, you won't be eager to refund the losses of more aggressive investors who certainly weren't planning to share their profits with you if their stock values had kept going up.

The biggest lessons of the banking crisis are that not all loans get repaid and when profits fall, workers get laid off.

These lessons apply to both individuals and the government.

With the Treasury running huge deficits that have soaked up every spare dime in the Social Security Trust Fund, the hope that future payroll taxes will be enough to cover all promised retirement benefits is beginning to fade. The gap has widened between the number of dollars promised and the number that can reasonably be expected to be collected from tomorrow's workers.

The stark reality is that for retirees without personal savings, pensions, or assets that can be sold, the last years of life will be lived at or near the poverty level, unless wealthier friends or relatives intervene. So why not bring back pensions that aren't affected by market dips and require nothing of the worker other than staying alive?

In the private workplace, pensions have been largely phased out because employers simply can't afford to put enough money into the pension funds to guarantee lifetime payouts. Government pensions remain popular because taxpayers haven't yet realized they're on the hook to cover any shortfalls. At some point soon, taxpayers will begin to protest.

For a nation much poorer than it thought it was a few years ago, personal savings remains essential for future welfare of almost everyone in non-government jobs.

To create a nation of savers, the 401(K) plans and IRAs that have replaced private pensions badly need reform. The recession has reduced almost all of their advantages.

It is now apparent that the tax-sheltered plans were designed less for us customers than for the companies that sell stock funds and collect hefty fees.

All the rules have been written with an assumption of healthy economic growth. Tax rules require retirees past a certain age to withdraw a certain amount each year, even if it's a terrible time to sell. Account holders are allowed to borrow money from 401(K) accounts, but if they don't pay it back within five years, which most don't, they pay taxes and big penalties.

The people making the worst choices or having the worst luck end up paying the highest penalties.

A selling point of the 401(K) has been the corporate match. But recently, the bad business climate has forced many companies to lower or eliminate the match. And many employees have stopped contributing, even though the average American family has only $29,000 in retirement savings.

The reforms that make financial sense for families and the nation will encourage safer, lower-cost savings plans. The new rules should not discourage employers from hiring or punish retirees for working.

The recession will leave us poorer, but if we learn from it, it will also leave us smarter.

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