
Forget the 401(k) – Let's Invent a New Retirement Plan - Reedx
https://www.wsj.com/articles/forget-the-401-k-lets-invent-a-new-retirement-plan-11549854600
======
philwelch
One of the most interesting ideas I've ever heard was to make any and all
savings deposits and investments tax-deductible, just like traditional IRA and
401(k) contributions--with the caveat that future withdrawals or returns are,
themselves, taxable income. This transforms the income tax into a consumption
tax, incentivizes savings of all kinds, and allows existing deductions and tax
credits to potentially keep the tax progressive.

You could argue that people with higher incomes would pay a smaller proportion
of their income as taxes, but this is beside the point--the only part of your
income you can actually use is whatever you don't save or invest, and though
you can just keep your savings and investments compounding indefinitely, you
have absolutely no incentive to do so unless you are planning or anticipating
for some future point in time where you or your heir withdraws and spends some
of that money, which is exactly the point when that (typically much larger)
sum turns back into taxable income.

~~~
skybrian
That would be quite the tax dodge. It lets you spread income over many years,
whichever way has the lowest tax rate.

~~~
iguy
Right now we charge someone who earns their lifetime income in 20 years much
more tax than someone else who earns the same total income over 40 years. A
change like this would remove this unfairness, but to collect the same total
amount (over say 60 years for both now) the brackets would surely be
different.

~~~
bradleyjg
If you get the same amount of money and then twenty years of leisure, surely
you are meaningfully better off than someone that had to work forty years for
it?

~~~
iguy
Fair point. How about a decade off raising kids?

~~~
bradleyjg
I'm sure it isn't intended this way, but this feels a little like a trick
question. Certainly there are benefits to society to people having children
and raising them well. But I don't think anyone has children and takes a
decade off to raise them _because_ it benefits society. Rather they do so
because it is something they want to do. Give that, if we take someone that
made $x dollars over 40 years of work and someone else that made $x dollars
over 30 years of work and took ten years off to raise kids, I would say the
latter is better off. That said, maybe we want to adjust the tax system to
favor the that second person anyway because of the spillover benefits, but
that's a different question than who is better off.

~~~
iguy
Sorry not intended as snark, I do think you raise a good point, and may yet
dim my enthusiasm for pure consumption taxes. But would be good to generate
more examples to think through.

One unfairness is people who have spiky incomes, like a guy who repeatedly
builds companies & sells them off, 4 years on ramen & 1 big payoff -- it does
seem unfair to put him in the tax bracket of those with 5 times his average
income. I have an idea many countries would let him smooth this out already,
but don't know the details.

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toomuchtodo
> Ideas include allowing your savings to follow you wherever you go or however
> you work

IRAs (which should replace 401ks entirely)? Wage increases so workers can
afford to save for retirement (and not need to raid their retirement accounts
for emergencies)? Also seems like a submarine piece for annuities.

401ks are underwhelming as a product. Congress should provide IRAs the same
creditor protection, allow employer contributions, and incentivize a
streamlined onboarding process (just as you provide ACH routing and account
number for your checking account rontour employer, you’d provide the same for
your IRA). This ensures portability, low costs (lots of competition in the IRA
space), and also prevents junk fees from 401k administrators since you’re not
a captive audience.

~~~
renholder
> _401ks are underwhelming as a product..._

Agreed. It wasn't too long ago that The Crash[0] wiped-out a large portion of
people's life-savings.

>Congress should provide IRAs the same creditor protection, allow employer
contributions, and incentivize a streamlined onboarding process...

Couldn't agree more _but_ what you're - essentially - describing is no
different than the pensions as exists in Europe [1,2,3,4].

This isn't meant to be an affront but, for some reason, Americans have grown
adverse to the idea of pensions; even though previous generations of Americans
enjoyed the fruits of that very same labour.

[0] - [https://www.cbsnews.com/news/retirement-dreams-disappear-
wit...](https://www.cbsnews.com/news/retirement-dreams-disappear-with-401ks/)

[1] - [https://www.revenue.ie/en/jobs-and-pensions/pensions/tax-
rel...](https://www.revenue.ie/en/jobs-and-pensions/pensions/tax-relief-for-
pension-contributions.aspx)

[2] - [https://www.deutsche-
rentenversicherung.de/Allgemein/en/Inha...](https://www.deutsche-
rentenversicherung.de/Allgemein/en/Inhalt/01_deutsche_rentenversicherung/unternehmensprofil.html)

[3] -
[https://www.island.is/en/senior_years/pensions_and_benefits/...](https://www.island.is/en/senior_years/pensions_and_benefits/pensions/)

[4] -
[https://www.pensionsmyndigheten.se/content/dam/pensionsmyndi...](https://www.pensionsmyndigheten.se/content/dam/pensionsmyndigheten/blanketter
---broschyrer---faktablad/other-
languages/presentations/Summary%20on%20the%20Swedish%20Pension%20System,%20by%20Bo%20K%C3%B6nberg.pdf)

~~~
jogjayr
I'm sorry I'm not sure I understand. How is a retirement account that you
control, and whose investments you direct, the same thing as a pension?

I always thought that a pension was defined as:

"Contribute $A/month for X years, and we'll pay you $B/month for Y years after
you retire - and don't worry about how it happens, you're guaranteed this
money if you qualify."

Is that not how pensions in Europe work?

~~~
thisone
Not in the UK, not anymore and those that do still exist are remnants that
don't accept new members.

Work place pensions now are like investment accounts, except you have some
degree of matching from the company and the government tops you up an extra
20% of what you contribute (it gets more complicated when you get into higher
tax brackets, like getting 40% top up on portions, but getting it back by
raising your untaxed income level instead of directly into the account. And
very high earners it gets more complicated)

As an individual you can also open a SIPP which is a personal pension
investment account, get all the government benefits but no company match of
course.

------
kartan
> Workers would still be free to opt out of saving entirely

This is never going to work. With so much people living check to check, who
has the money to save? This approach supposes that we are hommo economicus
able to take the best long-term decisions. We are not.

For me, the easy solution is tax people now to pay the retirement of older
people. Then, do that forever. It works in Europe.

But, will this work with a diminish population? Is not this a pyramidal
scheme?

The reality is that productivity has gone up way faster than population is
going down. The main problem is how to distribute that enormous wealth, not if
there is enough for everybody.

~~~
rattlesnakedave
Why should I have to pay for someone elese’s retirement?

~~~
lotsofpulp
In many tribes, the implicit contract is that if you are unable to have
children, raise a family, suffer a loss of family, or become disabled
yourself, then the tribe is still there for you.

Tribes that have an every man for himself ethos don’t really work out in the
long run. Turns out, working together and spreading risk over the tribe (or
country) is more sustainable and productive, hence they thrive and have a
competitive advantage.

~~~
rattlesnakedave
Right, sure. For truly unpredictable events like suffering a loss or becoming
disabled, the argument for a government funded safety net makes a bit more
sense. At what point should personal responsibility come into play? IMO it
should for something as predictable as “one day you will need to retire.”

~~~
lotsofpulp
Retirement is not very predictable at all. How long will you live? What
medical treatments will you need and how much will they cost? Are your skills
going to pay what you think they will for 20 to 40 years in the future?

We can’t even predict 2 years into the future, what chance do we have decades
in the future. Only certainty I can see is if one decides to kill themself
once they are no longer self sufficient. Even then, planning about doing it
and doing it are very different things.

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tracer4201
No idea what the article says because I don't have a WSJ subscription. It
would help if op could at least post a brief summary of what the author is for
or against.

------
bradleyjg
As a matter of social spending policy the tax expenditures for retirement
savings don’t strike me as terribly efficient. The benefit to society is that
it encourages people to save during their working years so they won’t have to
be supported by society during retirement. Fine, that’s decent reasoning. But
in the system as designed most of the forgone taxes go to relatively well off
people that would save and not end up on welfare regardless.

------
cbhl
I really liked Canada's approach to this, the "Tax Free Savings Account".

You get contribution room for every year that you are 18+ and a tax resident.
Money goes in post-tax; withdrawals of principle and growth are tax-free.
Withdrawals can happen at any time with no penalty; you get the contribution
room back in the following year.

Right now Canadians get $6000/year of contribution room; anyone who's been in
Canada since they were introduced in '09 has something like $63k of
contribution room accumulated. $6000 is a tangible number for a teenager with
a part-time or summer job, and the lack of withdrawal penalties means that the
account doubles as an emergency fund (which is what you should be doing with
your first dollars if you go by r/personalfinance's chart).

Then again, the Canadians also don't have the whole "savings accounts are
limited to six withdrawals" nonsense.

~~~
labcomputer
The USA already has something very similar, called a Roth Individual
Retirement Account (Roth IRA). The contribution limit is even the same, at $6k
USD/year

The main difference is that, before retirement age, Roth IRAs only allow the
principal (not the growth) to be withdrawn without penalties. Also, people who
earn more than around $150k are not allow to contribute to Roth IRAs (the
exact threshold is based on a tax calculation called MAGI)

~~~
cbhl
In my opinion, the Roth IRA would be much more successful if it was for
everyone, and not just "the poor".

\- Roth IRA is an investment account. Usually holds ETFs. TFSA can come both
as a savings account and an investment account. People with lower MAGI are
less likely to be able to weather the ups and downs of the market for their
emergency fund.

\- $150k MAGI is literally "any job at Google/Facebook"; and also roughly the
poverty line for family-with-two-kids in SF Bay Area due to the housing prices
here. Who actually has funds to put in a Roth IRA through the front door?

\- Contribution room mechanism means that you have to know your MAGI before
you can put money in it. In Canada, the banks display your contribution room
on the online banking portal, because the calculation is the same for
everyone.

\- Any mechanism for a withdrawal penalty makes it regressive. Rich people
rely on accountants or TurboTax to track basis; with the TFSA you can just
look at your balance to see if it's safe to withdraw money, making it
accessible to young people and immigrants.

\- Rich people can contribute to the Roth IRA through a Traditional IRA, and
in doing so, _contribute more per year than folks contributing through the
front door_.

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randomacct3847
Get rid of the Roth IRA income cap and raise the max annual contribution limit
4x. Not that hard.

~~~
tracer4201
I'm disqualified from contributing to a Roth IRA. My uninformed speculation on
why Roth IRA income caps and max annual contribution limits exist is that it's
the sake of tax revenue.

~~~
stouset
In practical terms, you’re not. Contribute to a traditional IRA. Roll it over
immediately into a Roth IRA. You can do this regardless of how large your
income is.

~~~
votepaunchy
Note: unless you have existing savings in a traditional IRA.

~~~
stouset
Yeah, this is an important caveat. If you have existing IRA funds, roll them
into a 401(k) first.

------
Aloha
I think this an important thing to note - Pensions are great when they're good
- but most were not that good. I do like the idea of a savings where I can
contribute money to, where some of it ends up being for retirement, and some
of it ends up not being. My biggest issue with the 401k, is the money is
locked in there, so if I honestly needed it, I'd be kinda screwed from a tax
point of view.

~~~
randomacct3847
Why is your money locked?

I think people make wayyy too much of the withdrawal penalty. Or assume that
you can’t even touch it until you’re retired. It could be way higher. If you
need the money 10% is not that bad...especially if you have an employer
contribution.

~~~
gafferongames
It's 10% penalty, and then you have to pay tax on it because it's income (at
least from a 401k). This is where it gets painful.

~~~
randomacct3847
So what? It’s pre-tax dollars so yes you pay income tax. You will have to do
that when you withdraw in retirement too.

If it’s for a emergency..like you lost your job then presumably you’d be in a
lower income bracket for that year.

~~~
Aloha
The penalty is unreasonable - that's my primary objection.

~~~
randomacct3847
10% is unreasonable? Are you saying there should be no penalty? I’m arguing
it’s low.

Every Californian (or anyone living in a state with high income tax) pays a
10% penalty just to live in that state.

Put another way, withdrawing from a 401k in a state with no income tax would
probably amount to the same amount of tax any Californian pays on their normal
income.

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bruxis
Here we go: [https://outline.com/mk7hFT](https://outline.com/mk7hFT)

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homerhomer
There's nothing like gambling with your retirement in the stock market.

~~~
jeffbax
Might I suggest you read up on some state run pensions, and see how much worse
they are doing. CA, IL, NJ, NY, MA are all having serious funding problems
after years of sweet deals and overly optimistic returns (which have done far
worse than the stock market) that the unfunded liabilities are eating other
parts of the state budget (and all these states are already way overtaxed)

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empath75
Get rid of 401ks entirely, they’re just a giant tax benefit to the wealthy.
Remove the cap on social security contributions and guarantee everyone a
livable retirement with social security.

