In any well-publicized business failure there always is a group of “widows and orphans”—the people who feel victimized by the firm that went broke and whose plight is given great attention in the media.
The widows and orphans in the Enron debacle apparently are those employees who concentrated their 401(k) holdings in company stock. Several recounted their woes to Congress a few days ago. One 61-year-old retiree saw her Enron stock shrink in value from $700,000 to $20,418. Another saw $1.3 million dwindle to $8,250.
My first reaction is much like that when I hear yet another teen-ager has died driving a snowmobile across thin ice: “Why would anyone do something so stupid?” Then I bite my tongue knowing that one of my own children might do such a thing or that I might have done it myself.
I have friends and relatives who might make the imprudent—yet human—mistake of putting all their retirement eggs in one fragile basket. The question then arises whether government should do anything to prevent similar losses in the future. Should some policy be changed or should responsible adults simply be left to learn their own lessons from the misfortune of others?
In Minnesota, several people die every year by driving snowmobiles through thin ice. So far, we have resisted erecting around every lake a chain-link fence with gates that are opened only when all the ice is safe. Society apparently believes the cost of protecting reckless individuals from themselves is disproportionately large relative to any eventual benefits.
Many will think the same is true about putting further limits on how companies can structure 401(k) plans. But two Democratic senators have introduced a bill limiting how much of any individual’s plan could consist of one stock. They would also limit the tax deductibility of any employer’s match in company stock.
This is the “government as nanny” phenomenon that has given the Democratic party a reputation for economic know-nothingness. The sponsors ignore the fact that no law obliges employers to offer 401(k) plans at all or to match employee contributions in any case. Their proposal might reduce the number of 401(k)s and the proportion of employers that make some match.
But the proposal highlights an important point. The government is already involved in 401(k) and other retirement plans. It allows contributions to 401(k) and other qualified plans to be exempted from federal income taxation at the time they are made. Employer matches are deductible as a business expense but are not taxable income to the employee.
These 401(k) plans are only part of an unnecessarily complex system of government subsidized retirement arrangements in the United States. We have traditional defined-benefit pensions, 401(k) and 403(b) plans, IRAs, Roth IRAs, Keoghs, SEPs and SAR-SEPs.
With my checkered employment history, I have at least nine different retirement plans and I am not unusual. These plans are complex and overlapping. As a nation, we spend a tremendous amount on financial advisers to tell us what plan fits best and what strategy we should follow.
Employers’ human resources departments devote a lot of time to managing enrollments and changes. The structure of the plans often motivates misallocation and waste of resources. Some provide perverse incentives that immobilize people in jobs they should leave while others encourage job jumping.
Federal legislation sanctioning such plans still tends to favor employees of large organizations over those who work for smaller companies or are self-employed. Administration costs are proportionately much higher for small employers, so people who work for a small company, especially in rural areas, are less likely to benefit from the federal subsidies embodied in all qualified plans.
Despite some limits on the amount of tax-sheltered compensation for high-salaried individuals, the overall system is regressive—that is, it benefits high-income people more than low-income people.
We have spent the last few years in a heated, but generally unproductive, debate about how to “fix” Social Security. What we really need is a broader look at how we finance retirement for all U.S. citizens at a time when demographic changes are making old systems less effective.
Such a review would look at government-administered social insurance programs such as Social Security and the overlapping hodgepodge of private, government-sanctioned plans that have grown up over the years.
We could structure a fairer and more efficient system that gives greater protection to more people at lower cost and results in fewer people dropping through the cracks.
Now is a good time to do it. The irrational exuberance of the 1990s bull market has worn off and the more extravagant claims of some Social Security reformers have been shown to be thin. But the need for constructive change remains. What we need is national leadership from both parties.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.