For years, I've been a cheerleader for 401ks where I work. I personally have helped at least a dozen people get set up over the years. To me, it seems like a no-brainer. Our company matches the first 5% of your pay that you contribute. If an employer wants to boost my pay by 5%, it seems a little rude to say no. And, for that first 5% that I contribute, I instantly double my money. That's a pretty swell rate of return.
Due to Rick Perry calling Social Security a Ponzi scheme, I've seen a lot of proposals lately to allow workers to contribute part of their social security taxes to a 401k like savings plan that they would own. Again, this strikes me as a common sense idea. The problem with Social Security is that the government really has no mechanism for actually saving the money. By law, they use the money to buy US Savings bonds. That money instantly goes into the federal budget and gets spent. The bonds are paid back from future tax revenue. It works as long as more and more workers pay into the system to support an ever growing number of retirees. Alas, there are demographic bubbles that will soon produce a system where the number of retirees grows much faster than the number of workers.
But, is the government administered saving plan any better? Is my company's 401k? The problem that I see is that, prior to the creation of the 401k, people investing in the stock market were mainly investing thier own money. They were buying stocks because they thought the price was attractive, and they were careful because they alone carried the risk.
But, with 401ks, every week millions of people turn their money over to financial institutions who buy stocks for them. They can't simply sit on the money until a good deal comes along. Week after week, they must go out and purchase stocks. And, if they pick wrong, perhaps they get a smaller bonus, but they don't actually lose their own money.
Can our present financial woes be at least partially traced to the fact that so many of us are subscribing to a mostly blind investment? Are those enough smart enough to plan for our own retirement through these plans unwittingly helping to create market bubbles that will eventually destroy any value we've accumulated?
And if so, what can we possibly do to fix this?