When Enron officials defrauded and destroyed employee 401k pension funds at that company last fall, the outrage at Enron corporate crimes was probably tempered for many by odd wistful envy. A bit like an old Monty Python skit, many families were thinking, "You had your pension plan looted? Where I grew up, we'd have loved to have a pension plan to be looted."
Enron should be prosecuted to the extent of the law for destroying the life savings of its largely professional workforce, but the sad reality is that the majority of workers in America have no pension plan at all in their workplace. When they retire, the only thing they will be able to depend upon is the small but guaranteed rock of Social Security.
The median family (those who are just richer than 50% of the population) has less than $10,000 in financial assets to pay for their future retirement. Many have nothing, while the richest 10% of Americans own 94% of all stocks, bonds or other financial wealth, and the richest 1% by itself owns nearly half (47%) of all financial wealth.
Some conservatives brush these numbers off noting that as long as everyone gained during economic booms, who cares if a few do a bit better? Despite the stock market boom in the 1980s and 1990s, the situation for average families has gotten worse. Comparing people now and back in 1983, two-thirds of American households today have not had any increase in pension wealth compared to households led by people of comparable age back then. And, based on data from the Federal Reserve, those families right in the middle saw retirement wealth fall 13% from 1983 to 1998.
It turns out that this pension wealth inequality is being subsidized by the tax system to the tune of hundreds of billions of dollars. The way the system is designed, the wealthy get massive tax breaks on their 401k pension contributions and average savers get little or nothing. The traditional 401k allows people to deduct their contributions from their income, then accumulate all new income on those savings tax free until they retire and pay taxes only on what they withdraw each year in retirement.
The first inequality is that tax deductions are worth more to wealthy people in higher tax brackets. Here's the math on a $30,000 yearly contribution to a 401k (the maximum allowed between employee and employer contributions). For a millionaire with a marginal tax rate of 40% in state and federal income taxes, that 401k contribution is worth $12,000 in extra cash courtesy of the government, while the same $30,000 contribution for a working person in the 15% tax bracket is worth only $4500. No working family can afford to put $30,000 of their income into a 401k, so even if they save $10,000 each year (a heroic achievement for most families trying to pay for health care and other mounting costs), the government will reward them with only a $1,500 cut in taxes versus the $12,000 each year that the government pumps into the wealthy person's pocket. This inequality expands exponentially as the money in the 401k multiplies tax-free until retirement. Worse yet, given the complicated taxation rules on retirement income, economic studies by researchers at the Federal Reserve and National Bureau of Economic Research have found that all the tax gains for working families are erased when they retire and most even end up paying MORE taxes than they would have if they never participated. But those same studies show that high-income individuals end up with a significantly higher lifetime after-tax income because of the 401k tax breaks.
So the bottom-line is that 401k tax rules end up benefiting only wealthy individuals.
How much does this tax break for the wealthy cost the federal budget? According to the new Bush budget, the total cost of the 401k tax break over the next five years will be $330 billion in lost federal revenue. This massive amount of lost revenue could instead directly increase Social Security payments 15-20% each year for all retirees today or shore up the social security trust fund for the future.
The 401k problem will only gets worse under present law. Last year's tax law introduced a new kind of 401k plan, labeled the Roth 401k after its original Senate sponsor, which will begin in 2006. The innovation of the Roth 401k is to tax the original contribution but to exempt all future increases in value from taxation, forever. This means that upper-income taxpayers will be able to amass vast multi-million dollar fortunes that will be immune from taxation for all time.
The new rules allow owners of these Roth 401k fortunes to not only pass them on tax-free to children and grandchildren, but allow those beneficiaries to continue accumulating and spending money from the Roth accounts free of income tax. Imagine a Roth 401k owner in 20 years with $1 million in his account at death; he leaves $100,000 to each of ten grandchildren. Under the exponential math of compound interest, those grandchildren could each enjoy by some estimates as much as $50-100 million of tax-free income over their lives from these Roth 401k bequests.
Not only does this threaten the bankrupting of funding for government services in the future, but the 401k system will create a whole privileged class of wealthy heirs living in a special tax-free world all their own. Before that day comes, we need to stop the Roth program and end the $330 billion 401k boondoggle for the wealthy.
Nathan Newman is a longtime union and community activist, Email nathan@newman.org or see www.nathannewman.org.