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> "The US workforce (at the time) was sold on 401ks as a replacement for pensions, when they’re really for only the highest compensation earners as a tax dodge.

> "The US workforce (at the time) was sold on 401ks as a replacement for pensions, when they’re really for only the highest compensation earners as a tax dodge..." pensions don't really make sense though, because they create adverse incentives all around. first, for the pensioner, who transfers future risk to the pension, and by extension to the company, its customers, employees, and shareholders. and second, it's a big pot of money just sitting there begging the greedy to tirelessly and surreptitiously work to siphon off just a tiny spigot of it. and those are just the two most obvious ones. parhaps the risk profile is too far in the opposite direction, but 401(k)'s could be fixed, for instance, by requiring companies to set up and contribute inverse-proportionally to monthly take-home pay, and tax the company progressively on contributions based on total compensation, so that highly-paid executives who need a 401(k) the least would be discouraged from that avenue of compensation, while the least-paid employees get a (partially-)funded retirement account automatically.

gizmo686 5y ago
The issue with the 401k is that it is essentially an anti-progressive tax. It is there as a way for the government to encourage and subsidize retirement savings; but it does so by providing a 1:1 deduction on taxable income (with a choice of taking the deduction now or during retirement). This means that you get a greater benefit (read subsidy) if you are at a higher tax bracket; even if you are looking at the benefit in percentage terms instead of absolute. If you don't pay income tax, you get no benefit from a 401k. We can go a long way to solving this by just making the subsidy a flat refundable tax credit. If we wanted to make it progressive, we could to the inverse of progressive income tax: by making the first $X get you a Y% credit, with a decreasing credit as you go up in contribution brackets.
- bradleyjg 5y ago
  The savers tax credit is similar to what you are proposing. https://www.investopedia.com/articles/retirement/04/031704.asp https://www.investopedia.com/articles/retirement/04/031704.a...
- clairity 5y ago
  yah, 401(k)'s are financially engineered to seem to be for the masses, but they're really designed to advantage high-earners even more. i'd actually prefer to remove the tax advantage altogether (and plow that into an overall more progressive tax structure), but absent that, a credit phase-out would be better than what we have.
- OldHand2018 5y ago
  > If you don't pay income tax, you get no benefit from a 401k. Aside from the fact that the money you manage to put into it will still be there (with very high probability). But, you do know that employers are allowed to offer “Roth 401k” plans too, right?. If you pay little to no income tax now, they are fantastic.
deleted 5y ago
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bryanrasmussen 5y ago
>pensions don't really make sense though, because they create adverse incentives all around. first, for the pensioner, who transfers future risk to the pension, and by extension to the company, its customers, employees, and shareholders. and second, it's a big pot of money just sitting there begging the greedy to tirelessly and surreptitiously work to siphon off just a tiny spigot of it. and those are just the two most obvious ones. well if a pension doesn't make sense because it's a big pot of money attractive to greedy criminals then all sorts of big pots of money don't really make sense though, so in that case I don't think that argument really works. >for the pensioner, who transfers future risk to the pension this is probably me being silly but how is the pensioner transferring future risk?
- clairity 5y ago
  actually yes, most big pots of money become poorly allocated (from graft, ossification, or whatever), whether via government, market, or some other mechanism. under uncertainty (which, in the real world, is always), we're better off having 10 relatively decoupled, medium-sized pots over 1 large, more easily corruptible pot, in all ways that matter to a society and economy (not so much to politics, the quest for power, though). the pensioner has no idea how long they'll live, so the amount of money to save for retirement is uncertain, as is the returns on investment to meet that need. this future risk is transferred to others, as the pensioner does nothing to mitigate them, the company through its pension plan does. risk transference is a key ingredient of adverse incentives (e.g., principal-agent problems).

gizmo686 5y ago

The issue with the 401k is that it is essentially an anti-progressive tax. It is there as a way for the government to encourage and subsidize retirement savings; but it does so by providing a 1:1 deduction on taxable income (with a choice of taking the deduction now or during retirement). This means that you get a greater benefit (read subsidy) if you are at a higher tax bracket; even if you are looking at the benefit in percentage terms instead of absolute. If you don't pay income tax, you get no benefit from a 401k. We can go a long way to solving this by just making the subsidy a flat refundable tax credit. If we wanted to make it progressive, we could to the inverse of progressive income tax: by making the first $X get you a Y% credit, with a decreasing credit as you go up in contribution brackets.

bradleyjg 5y ago
The savers tax credit is similar to what you are proposing. https://www.investopedia.com/articles/retirement/04/031704.asp https://www.investopedia.com/articles/retirement/04/031704.a...
clairity 5y ago
yah, 401(k)'s are financially engineered to seem to be for the masses, but they're really designed to advantage high-earners even more. i'd actually prefer to remove the tax advantage altogether (and plow that into an overall more progressive tax structure), but absent that, a credit phase-out would be better than what we have.
OldHand2018 5y ago
> If you don't pay income tax, you get no benefit from a 401k. Aside from the fact that the money you manage to put into it will still be there (with very high probability). But, you do know that employers are allowed to offer “Roth 401k” plans too, right?. If you pay little to no income tax now, they are fantastic.

deleted 5y ago

[deleted]

bryanrasmussen 5y ago

>pensions don't really make sense though, because they create adverse incentives all around. first, for the pensioner, who transfers future risk to the pension, and by extension to the company, its customers, employees, and shareholders. and second, it's a big pot of money just sitting there begging the greedy to tirelessly and surreptitiously work to siphon off just a tiny spigot of it. and those are just the two most obvious ones. well if a pension doesn't make sense because it's a big pot of money attractive to greedy criminals then all sorts of big pots of money don't really make sense though, so in that case I don't think that argument really works. >for the pensioner, who transfers future risk to the pension this is probably me being silly but how is the pensioner transferring future risk?

clairity 5y ago
actually yes, most big pots of money become poorly allocated (from graft, ossification, or whatever), whether via government, market, or some other mechanism. under uncertainty (which, in the real world, is always), we're better off having 10 relatively decoupled, medium-sized pots over 1 large, more easily corruptible pot, in all ways that matter to a society and economy (not so much to politics, the quest for power, though). the pensioner has no idea how long they'll live, so the amount of money to save for retirement is uncertain, as is the returns on investment to meet that need. this future risk is transferred to others, as the pensioner does nothing to mitigate them, the company through its pension plan does. risk transference is a key ingredient of adverse incentives (e.g., principal-agent problems).