Has the 401(k) failed?
In the wake of the stock-market meltdown, that question is on the minds of a growing number of policy makers, academics and corporate leaders -- not to mention the account holders staring in disbelief at their quarterly statements.
On this level, the 401(k) makes a lot of sense: The government ought be encouraging people to save for their retirement. Adjusting the tax code to favor preferred behaviors is one of the more powerful behavior modification tools government has at its disposal.
On the other hand, as a red blooded, free-market, conservative, I do not much like the idea of my mom investing her retirement in the stock market. Free Markets are places where skilled, sophisticated participants profit at the expense of less able particpants. To the degree that the Stock Market is a free market, casual investors like my mother are, rightfully, going to get fleeced. To protect investors like my mom, we have tangled webs of market regulation. Given the situation we are in now, it is at least fair to question whether the regulation really adequately protects people like my mom. And we need to properly consider the cost. Over the past ten or so years, we have repeatedly been beaten over the head by the reality that our equity markets are failing miserable at what conceptually is their primary function -- the oversight of corporate management. It is no leap to imagine that efforts to make the stock market a safer place for casual investors contributes substantitively to that failure.
To take this tangent a bit farther, I additionally suspect that the abundance of pension money in our financial system corrodes the quality of our investment professionals. In a classical free-market model, customers hold companies accountable. Less competitive companies have less ability to attract and retain clients and, so, get weeded out. But as intelligent and capable as my mom is in her own domain, I question how effectively she oversees the services provided to her by financial service professionals. Without customers sophisticated enough to properly hold them accountable, companies inevitably become less competitive.
For this reason, I fear proposals like "Automatic IRA".
From a consumer perspective, I am a big fan of annuities. When I retire, I'd love to simply be able to convert my savings into an inflation-indexed income (+healthcare). On the macro level, longevity risk is very much the sort that calls for pooling.
As a practical matter, its harder to see how this could work. A company selling an annuity recieves its revenue right away and holds a long term liability. It could take fifteen or more years before it is determined whether or not a company rightfully priced the annuities it sold. Given what we have seen of how financial services companies operate, its hard to imagine that, should annuities become a popular retirement option, companies won't aggressively price to drive short term revenue and profits, and then wind up in a ponzi scheme which collapses as soon as demand for annuities, for whatever reason, diminishes.
Government backed annuities wouldn't be much better. Given what we have seen of how government interacts with financial services, its hard to imagine that in an effort to spread access to annuities, government wouldn't engage in the same sort of ponzi scheme. (As it did, to some degree, with mortgages).
To the degree that one believes that the FDIC and PBGC function well, some analogue would be called for, but I suspect that such entities will inevitably be underfunded in a time of crisis.
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