How Washington Keeps Millions from Being Millionaires

By Dr. Merrill Matthews Institute for Policy Innovation Where are all the defenders of 401(k) plans when it comes to the topic of reforming Social Security so that it operates a similar way? The Republicans tax reform package could limit how much workers are allowed to deposit tax free in their 401(k) plans. That possibility spurred numerous commentators to expound on 401(k)s financial benefits. Take for example syndicated personal finance columnist Michelle Singletarys recent column We can all learn from 401(k) millionaires. She writes The proof of the success of the 401(k) or TSP Thrift Savings Plan essentially a 401(k) for federal employees had been the ability of an increasing number of participants to reach a high milestone. That milestone is $1 million or more in retirement savings. Shes right of course. She says the TSP had 16475 contributors with $1 million-plus as of August this year up from 2675 millionaires in 2014. She also writes that Fidelity Investments boasted 72000 of their 401(k) accounts passed the $1 million mark in 2014 up from 21000 in 2009. After hearing from some on them Singletary emphasizes that these millionaires didnt come from money.  They became millionaires by patiently putting money into their company plan every paycheck. Of course not everyone has access to a 401(k)though they probably have access to an IRAand many workers cant afford to put much in their account anyway. But what if workers had access to funds that werent part of their take-home pay that they could dedicate to a 401(k)-type retirement plan? Wait they door should! The 12.4 percent payroll tax that Washington yanks from every paycheck to pay Social Security benefits. If workers could put that 12.4 percent into a type of 401(k) that belonged to them 40 or 45 years of regular deposits and compounded interest would make millionaires out of millions of middle-income workers. Unfortunately every time conservatives have proposed such a reform over the past three decades or more liberals go on a whining binge claiming that stock markets go down and people cant be trusted with that money anyway. Um so government CAN be trusted with that moneymy money? Yes markets do go down but over the long haul they go upway up. The key is to restrict investment options to broad-based vehicles that track say the S&P 500 or the Russell 3000 Index. In short no day trading or risky schemes Al Gores characterization of personal Social Security accounts. There simply is no government plan that can compete with the financial benefits and security of regular contributions to a savings plan bolstered by compounded interest. Just ask the 401(k) millionaires. Todays PolicyByte was written by Dr. Merrill Matthews resident scholar with the Institute for Policy Innovation.