Oh Damn, 401(k)s Aren't Magic

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America’s pension system is a disaster. The great dream of “market-oriented” types is that our retirement problems can be solved by making everyone invest their own money via 401(k) plans. But... how does that work, again?

There is an entire strain of bootstrap-pulling personal finance advice that puts forth the idea that all poor people really need to do in order to turn around their financial lives is to be responsible with their money—to be thrifty, to save, to invest responsibly. This sort of advice can be found in any number of self-help books featuring bold, business-suited men or women on the cover, and on the lips of any number of Republican politicians, who work to dismantle social safety net programs like Medicare and Social Security, which make you lazy, and encourage things like “personal health savings accounts” and 401(k) accounts, which encourage you to take control of your own financial future. And win!

All of this has always ignored the mathematical fact that scrimping and saving and investing wisely will not save you if you don’t have enough money in the first place. If you are a low-wage worker who cuts your expenses to the bone in order to sock away $500 a year, on which you earn 8%, you will still not go more than a year in retirement without starving to death. The math just doesn’t work. We need to actually give people more money. This is common sense, but is anathema to the sort of magical thinking that says that the root of all poverty is bad decisions by the poor.


It is routine now for employers to automatically enroll workers in 401(k) plans, so that they are more likely to save a portion of their salaries in retirement investment accounts. Okay, fine. So what is the effect of that on a grand scale? Does it provide for a living in retirement for all of these forced savers? No, it turns out that when you make people who don’t earn a lot of excess money put money away, they just take out more debt!!!! The Wall Street Journal reports on the findings of a new study—bolding ours, for ease of math:

[The] study found that four years after hire, the employees who were auto-enrolled amassed an average of $3,237 more in 401(k) contributions than those who were left to sign up on their own. (That number includes both employee and employer contributions, but not market growth.)

But the auto-enrolled employees also had an average of $1,563 more in consumer and auto debt than those who were hired before auto-enrollment. When mortgage debt is factored in, the picture becomes more complicated. The auto-enrolled employees owed $4,131 more, on average, on their homes than their colleagues who were hired before auto-enrollment.

This debt more than offsets the extra $3,237 the auto-enrolled employees contributed to the plan, including the employer match.


In short, the study found that while these people put away more for retirement, those savings were more than canceled out by increased debt those people took on.

You can’t force people to save money if they don’t have enough money to begin with. We don’t need self-help books. We need wealth redistribution.