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Hearing on 401(k) plan grows to urban legend

On top of the high economic anxiety we’re all slogging through these days, recent reports of congressional plans to “do away with 401(k) plans” aren’t helping.
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On top of the high economic anxiety we’re all slogging through these days, recent reports of congressional plans to “do away with 401(k) plans” aren’t helping. So let’s all take a deep breath and review the facts.

I started out putting more in my 401(k). When I heard the plan from congressional Democrats to seize my 401(k) earnings and place them in a 3 percent new Social Security, I reduced to my previous investment level. Why throw in more money to be trashed by the federal government? At least I have a chance of return in the market.
Marc W., Fairfax, Va.

The explosion of information — especially as it applies to politics — is technology’s greatest gift to democracy. In the blink of a blog post, an idea can make its way around the world and back. If nothing else, this new reality is one of the best rebuttals to the notion that the Mainstream Media (whatever that is: Can someone please send us a list of its members?) is somehow controlling the political discourse of the 21st century.

In this case, the news that “the Democrats want to take away your 401(k) savings” turns out to be little more than last-minute election fearmongering.  We try to keep it nonpartisan here at the Answer Desk, so let’s try to review the facts.

The Democrats’ supposed assault on the 401(k) program began percolating last week on a few blog posts and e-mails but jumped into “wider distribution”  (OK: “the MSM” if you prefer) when it began showing up on the stump. In a Friday interview with CNBC’s Larry Kudlow, Republican presidential candidate Sen. John McCain said of the Democratic-controlled Congress:

“They want to take the 401(k)s and use that money to give that to the government to spend, rather than people,” he said. “And I think that’s very dangerous disincentive to savings, which is exactly the cause of one of our problems, as we all know.”

Here’s where we all take a deep breath. There is no proposal in Congress to take away your 401(k) savings account. In any case, the stock market has already done a pretty good job of wiping out several trillion dollars worth of 401(k) savings without any help from Congress.

And that, in fact, is precisely what prompted Rep. George Miller, D-Calif., head of the House Committee on Education and Labor, to convene a hearing on Oct. 7 to review a number of proposals to improve on the 401(k) plans that have become the mainstay of most Americans’ retirement income.

At that hearing, one of the witnesses, Teresa Ghilarducci, an economics professor at The New School for Social Research, made an interesting observation. By her calculations, the government spends as much as $80 billion a year in tax breaks to subsidize 401(k) savings plans. In her opinion, that money could be better spent offering a tax credit for a revised retirement plan that would guarantee a minimum income stream to people who saved for retirement. You’d give up some of your tax savings in return for a guaranteed return for life.

Some of the other panelists didn’t agree with her. In any case, it was a hearing. The purpose of hearings is to “hear” new ideas. Testimony is not legislation. So far, that’s as far as this idea has gotten.

It may be a terrible idea. But there’s a lot wrong with the 401(k) program.  For starters, these retirement accounts have dramatically shifted two huge risks from employers to individuals. One — call it “longevity risk” — used to be spread over a large number of retirees. For every pensioner who collected until they were 90, those payments were offset by checks not paid to plan members who died younger. Large, defined-benefit pension plans pooled this risk. Today, you’re on your own. You have to assume you’ll live to be 90, even though the odds are against it. If you don’t save enough, you risk running out of money if you happen to beat the longevity odds.

Individually managed 401(k) plans also come with a much bigger investment risk. Managing a portfolio of retirement investments takes time and skill, and it costs money. Hiring a full-time money manager to look after the welfare of millions of retirees at a time turns out to be a lot more efficient — and cheaper — than turning each of us loose on our own accounts. One of the key issues Miller’s hearing focused on was the variety of hidden fees we’re all paying to the financial services industry to “help” us manage our retirement savings.

We’re all now learning — the hard way — that 401(k) accounts are an imperfect program for guaranteeing economic security in retirement. The Social Security system we now rely on was created in the wake of a financial upheaval not unlike what we’re now experiencing. 

So maybe it’s not such a bad idea to start listening to new ideas.

Why it is that oil has dropped to around $65 a barrel and we are paying $2.75 a gallon? Last time oil was this low we were only paying around $2.10 a gallon.
Javier G. Orlando, Fla.

The recentcrash in oil and gasoline prices, we hope, will help put to rest the widely held belief in “price gouging” conspiracies that were fed by the run-up in pump prices that accompanied the latest peak in demand.  As we wrote then, the price of gasoline is set by the market, not by the people who produce it.

Like any product, the retail price includes fixed costs, including the price of the raw material (in this case, crude oil), production and transportation costs, taxes, etc. But when that product gets to market, the price is determined by the balance of supply available at any given moment to satisfy the demand from buyers who will shop for the lowest price. We’re now seeing the flip side of that equation, though you won’t see many headlines screaming: “Pump prices plunging!”

The recent spike in the retail price of gasoline forced us all to cut back, which produced a sharp drop in demand. From a peak of 9.7 million barrels a day in August 2006, U.S. gasoline demand fell by roughly 1 million barrels a day — or 10 percent — as of the beginning of October. With less demand from refiners for gasoline and other fuels worldwide, crude prices have crashed more than 50 percent from their peak.

Lower demand for gasoline, along with cheaper crude oil, have sent pump prices falling from $3.83 a gallon (the “national city average” tracked by the Energy Department) in mid-September to an average $2.65 a gallon as of last week. That’s a 30 percent drop in just six weeks. So much for the theory that greedy oil companies manipulate prices. (Unfortunately, the drop in prices has sent demand rising again. But as the economy continues to slow, demand will probably remain weak.)

As for Javier’s analysis of the relationship between crude costs and pump prices, I came up with a different set of numbers from the Energy Department’s Web site. In June 2007, the last time crude was in the mid-$60s, pump prices averaged $3.05 a gallon — 40 cents higher than the price of a gallon today. The reason pump prices were higher then, with the same cost of crude: Demand was higher. As I read the historical data, the last time we had $2.10 a gallon gasoline, crude was trading just below $50.