Social Insecurity: 401(k)s Under Attack

401(k) retirement plans — those marvelous engines of empowered financial liberation, in which an employee decides how much to contribute toward his own tax-advantaged retirement account, and directs the account’s investment himself — have come under heavy attack over the last couple years by paternalistic statists who want to keep you poor for your own protection.

When the Enron scandal unfolded, it turned out that a lot of Enron employees had invested their 401(k)s in Enron stock — which subsequently evaporated. And more broadly, as the bear market of the last three years has played out, many 401(k) investors have seen their account values decline for the first time — in some cases quite severely. The paternalists whine that this is the inevitable tragedy that occurs anytime you let people manage their own lives. Oh, for the good old days when trustworthy companies managed pensions on behalf of their employees — and shame on anyone who would suggest that people should manage their own private Social Security accounts!

I’ve always wondered why anyone who claims to be concerned with protecting employees would so urgently not want them managing their own pensions that they would prefer to have Enron do it for them. And the answer I always got was, “If Enron screws it up, the employee is always covered by the Pension Benefit Guaranty Corporation.” That’s the government agency that stands behind corporate pension funds, roughly in the same way the Federal Deposit Insurance Corporation stands behind bank accounts.

Now it turns out that there have been so many corporate bankruptcies in the last couple years that PBGC’s $8 billion trust fund may not be enough to meet all the liabilities it’s had to assume. That doesn’t mean that PBGC doesn’t have the cash to pay pension benefits — it does, for many years to come. What it does mean is that PBGC is “underfunded” — in other words, the value of its trust fund is less than the actuarial present value of its liabilities.

There are only two-and-a-half ways that the PBGC can get back up to full funding. The “half” way is to hope that interest rates go up, which will lower the present value of PBGC’s liabilities (hopefully more than it will lower the value of PBGC’s assets, all of which are in government-issued bonds). But if that doesn’t bail out PBGC, they’ll either have to increase the mandatory premiums that they charge companies with pension plans, or take money from general tax revenues.

So…connect the dots. It doesn’t take a genius. Kill 401(k)s (for the employee’s own protection, of course), and its a short step to full-out taxpayer funding of pension benefits. It’s just Social Security, all over again. Don’t they ever learn? Don’t you?


Don Luskin

Don Luskin is Chief Investment Officer for Trend Macrolytics, an economics research and consulting service providing exclusive market-focused, real-time analysis to the institutional investment community. You can visit the weblog of his forthcoming book ‘The Conspiracy to Keep You Poor and Stupid’ at He is also a contributing writer to