“401k? We don’t need no stinkin’ 401k!” (Actually, I kinda do)

Republicans talk an awful lot about less dependence on the government–that people need to be more self-reliant. While I agree, I do feel part of government’s role is to help people be more self-reliant.  To me, the retirement plan known as the 401k is one of those things that enable people to be independent. It’s a great way for average Americans to save a bundle for retirement, and with little government involvement. Recently Congress has proposed changes to the 401k, changes that may both hurt us in the long run as a nation and negatively impact the middle-class.  

First, what’s being proposed?  The 401k (and it’s sister the 403b) is a retirement account many people have heard of, although only half of Americans actually use.  Essentially, an American worker can invest income earned from their job into this account and save for retirement.  Many companies will also match funds, which helps the worker save more than they could on their own.  Because all the money contributed is saved before taxes are taken out from their paycheck, this reduces the amount of taxes the employee has to pay today. When the worker pulls money out during retirement, then they pay taxes on it.  Now Congress wants to change that rule: instead of taxing the money when you withdraw it during retirement, they want to tax most of it today and let it grow tax-free.  I say “most” because they’re proposing the first $2300 to be contributed pre-tax, and then any additional contributions post-tax.  So to recap, 401k’s let you save money for retirement.  Today, all your contributions to a 401k are pre-tax, lowering how much you pay in taxes to the government.  When you retire and withdraw the money, you pay taxes on the withdrawals. You might be thinking, who cares?  The reason it bothers me is that the proposed change isn’t about helping middle-class Americans save for the future, it’s about paying for tax cuts for wealthy Americans: In addition to the changes to the 401k, Congress is proposing tax cuts to the wealthiest Americans, as a result, there’s a budget shortfall that needs to be made up somewhere.  That somewhere is the 401k.  Look, if Congress said, “You know what would be better for Americans?  Everyone should have a 401k and let your money grow tax-free!” A proposal which in reality might help the American middle-class worker, I’d be on board…but that’s not what’s happening.  Instead, Congress wants to cut taxes for high-wealth individuals and then raise taxes on the middle class to pay for it.  It’s that simple.

This doesn’t make sense for our government for several reasons.  First, they’re essentially reducing their income for the long term.  By lowering taxes on the wealthy, they obviously reduce the tax base today.  By raising taxes on the middle class they offset that loss, but only for today.  Once Americans retire and begin withdrawing those 401k funds, under this proposal, they’re not exposed to taxes.  The government loses again.  It’s a shitty way to finance a country.

Another reason it doesn’t make sense is that only around 55% of Americans who can contribute to a 401k actually do.  One reason for this is it’s complicated and people don’t understand it.  Instead of complicating it further, Congress should simplify the process by requiring companies to automatically enroll employees into their 401k and then the employee can choose to opt out.  By doing this, theoretically, more Americans would be able to fund their retirement, raising the tax base for the future and lessening the burden on government.

Finally, the argument right now is tax breaks for the rich trickle down to the rest of us. It’s a myth. Look, I’m not an economist (in fact, I liked Econ 101 so much in college, I took it twice!) but I have half a brain.  I can read.  I don’t know what a good tax rate for our country is, but I do know I like roads, and police and Medicare…to pay for these community services, we need money.  I’m happy to pay my share, but cutting taxes on the wealthy paid for by the rest of us is asinine.


Links to two articles for more info are below: