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October 31, 2017

How Washington Keeps Millions from Being Millionaires


Where are all the defenders of 401(k) plans when it comes to the topic of reforming Social Security so that it operates a similar way? 

The Republicans’ tax reform package could limit how much workers are allowed to deposit tax free in their 401(k) plans. That possibility spurred numerous commentators to expound on 401(k)s’ financial benefits. 

Take, for example, syndicated personal finance columnist Michelle Singletary’s recent column “We can all learn from 401(k) millionaires.”  

She writes, “The proof of the success of the 401(k) or TSP [Thrift Savings Plan, essentially a 401(k) for federal employees] had been the ability of an increasing number of participants to reach a high milestone.” That “milestone” is $1 million or more in retirement savings.  

She’s right, of course.  

She says the TSP had 16,475 contributors with $1 million-plus as of August this year, up from 2,675 millionaires in 2014. She also writes that Fidelity Investments boasted 72,000 of their 401(k) accounts passed the $1 million mark in 2014, up from 21,000 in 2009. 

After hearing from some on them, Singletary emphasizes that these millionaires “didn’t come from money.”  “They became millionaires by patiently putting money into their company plan every paycheck.”  

Of course, not everyone has access to a 401(k)—though they probably have access to an IRA—and many workers can’t afford to put much in their account anyway. 

But what if workers had access to funds that weren’t part of their take-home pay that they could dedicate to a 401(k)-type retirement plan? 

Wait, they do—or should! The 12.4 percent payroll tax that Washington yanks from every paycheck to pay Social Security benefits. 

If workers could put that 12.4 percent into a type of 401(k) that belonged to them, 40 or 45 years of regular deposits and compounded interest would make millionaires out of millions of middle-income workers. 

Unfortunately, every time conservatives have proposed such a reform over the past three decades or more, liberals go on a whining binge claiming that stock markets go down and people can’t be trusted with that money anyway. 

Um, so government CAN be trusted with that money—my money? 

Yes, markets do go down, but over the long haul they go up—way up. The key is to restrict investment options to broad-based vehicles that track, say, the S&P 500 or the Russell 3000 Index. In short, no day trading or “risky schemes,” Al Gore’s characterization of personal Social Security accounts. 

There simply is no government plan that can compete with the financial benefits and security of regular contributions to a savings plan, bolstered by compounded interest. Just ask the 401(k) millionaires.


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