Author Topic: 401k is a failure. They don't work  (Read 10150 times)

r3dt4rget

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401k is a failure. They don't work
« on: March 23, 2015, 12:36:16 PM »
http://www.msn.com/en-us/money/retirement/time-to-call-it-for-millions-401-k-is-a-failure/ar-BBiBshq#fullstory

To sum it up, "optional" contribution plans even with nice tax advantages, company matches, etc., are a failure because individuals do not contribute enough or consistently. Some are advocating for the elimination of tax advantaged plans and forming a government retirement account.

Because, it never occurred to anyone that the solution is to just save more!

Jack

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Re: 401k is a failure. They don't work
« Reply #1 on: March 23, 2015, 12:38:31 PM »
That article is failing to load for me right now, but the same issue is already being discussed at http://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/cnbc-making-the-call-401k%27s-are-a-failure/

zephyr911

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Re: 401k is a failure. They don't work
« Reply #2 on: March 25, 2015, 09:24:44 AM »
Oh my gawd, I had do fire back at one of the commenters. I don't usually rise to that bait, but the whinypants bullshit was strong there.

MrsPete

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Re: 401k is a failure. They don't work
« Reply #3 on: March 26, 2015, 06:16:09 AM »
forming a government retirement account.
We have that.  It's called Social Security, and isn't it just running like clockwork?

Killerbrandt

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Re: 401k is a failure. They don't work
« Reply #4 on: March 26, 2015, 10:03:44 AM »
OMG!! The comments on that site make me want to scream!! lol

zephyr911

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Re: 401k is a failure. They don't work
« Reply #5 on: March 26, 2015, 02:42:11 PM »
forming a government retirement account.
We have that.  It's called Social Security, and isn't it just running like clockwork?
Sarcasm I know, but SS was working fine until 1) its surplus was raided by Congress to pay other bills, and 2) life expectancy increased dramatically without sufficient adjustments to the program. Small quantitative changes would be sufficient to keep it solvent through this century and beyond.

El Gringo

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Re: 401k is a failure. They don't work
« Reply #6 on: March 26, 2015, 03:07:05 PM »
OMG!! The comments on that site make me want to scream!! lol

To help you calm down, read the comments to this article: http://fortune.com/2015/03/25/fidelity-401k-millionaire

It's like all the commentators came over from the forum!

zephyr911

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Re: 401k is a failure. They don't work
« Reply #7 on: March 27, 2015, 09:34:44 AM »
OMG!! The comments on that site make me want to scream!! lol

To help you calm down, read the comments to this article: http://fortune.com/2015/03/25/fidelity-401k-millionaire

It's like all the commentators came over from the forum!
I'm getting giddy just reading all the smackdowns.
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#4 has got to be the worst analysis from a so-called financial column in history.  And amazing that a "senior Fortune editor" would write such a thing.
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Anyone who consistently invested bi-weekly or bi-monthly into a 401K Index Fund through the two crashes in the 2000s ended up having excellent returns, way above what the 10 year return of the S&P 500.  It's called dollar cost averaging and you'd think a senior editor for a magazine called "Fortune" would catch such a simple mistake.
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How irresponsible of Fortune
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Totally disagree that the behaviioral steps listed will not get you to a large retirement.  Possibly not to a million(for me actually it was two million)
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This guy is an idiot, and I say that in the kindest way possible.   In other words, he's got an axe to grind and he grinds it in public.

TinyLightsBelow

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Re: 401k is a failure. They don't work
« Reply #8 on: March 27, 2015, 11:22:34 AM »
Quote
"I'm not saying defined benefit plans are flawless, but they certainly didn't put as much of the risk and responsibility on the individual," said Terrance Odean, a professor of finance at the University of California, Berkeley's Haas School of Business.
holy crap! individual responsibility! oh noez!

One Noisy Cat

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Re: 401k is a failure. They don't work
« Reply #9 on: March 27, 2015, 11:34:39 AM »
OMG!! The comments on that site make me want to scream!! lol

To help you calm down, read the comments to this article: http://fortune.com/2015/03/25/fidelity-401k-millionaire

It's like all the commentators came over from the forum!
I'm getting giddy just reading all the smackdowns.
Quote
#4 has got to be the worst analysis from a so-called financial column in history.  And amazing that a "senior Fortune editor" would write such a thing.
Quote
Anyone who consistently invested bi-weekly or bi-monthly into a 401K Index Fund through the two crashes in the 2000s ended up having excellent returns, way above what the 10 year return of the S&P 500.  It's called dollar cost averaging and you'd think a senior editor for a magazine called "Fortune" would catch such a simple mistake.
Quote
How irresponsible of Fortune
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Totally disagree that the behaviioral steps listed will not get you to a large retirement.  Possibly not to a million(for me actually it was two million)
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This guy is an idiot, and I say that in the kindest way possible.   In other words, he's got an axe to grind and he grinds it in public.

    The author automatically assumes that people who are predicting low stock returns are right.  Perhaps they are but 1) they can easily be wrong as the "Death of Equities" article in a 1979 "Business Week" article was and 2) I face punch myself everyday that back in the 1970s I didn't devote 20% of my summer jobs paychecks to investing in a low returns stock market, or even bank CD's. If you are smart, you buy things when they are on sale.

zephyr911

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Re: 401k is a failure. They don't work
« Reply #10 on: March 27, 2015, 11:47:45 AM »
The author automatically assumes that people who are predicting low stock returns are right.  Perhaps they are but 1) they can easily be wrong as the "Death of Equities" article in a 1979 "Business Week" article was and 2) I face punch myself everyday that back in the 1970s I didn't devote 20% of my summer jobs paychecks to investing in a low returns stock market, or even bank CD's. If you are smart, you buy things when they are on sale.
It wouldn't even matter if he *was* right. That would amount to writing off an entire investing strategy for a 30-year career based on today's conditions. Market performance over the next few years has virtually no bearing on the validity of any given approach over that length of time.

Cpa Cat

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Re: 401k is a failure. They don't work
« Reply #11 on: March 27, 2015, 12:13:33 PM »
I like how the majority of his arguments basically come down to "But I don't wanna."

Company doesn't have a match? GIVE UP NOW! YOU WILL BE POOR FOREVER! [Maybe just save 5% more?]

People with fat 401k balances don't borrow from them or cash them out? IMPOSSIBLE! I WANT TO SPEND ALL MY MONEY AND BE A MILLIONAIRE IN RETIREMENT!!!

The people with the highest 401k balance are the ones who have worked the longest and most consistently throughout their careers? BUT I HATE WORKING! LAME!

A 4.8% return? LOTS OF PEOPLE SAY 4% IS ALL YOU CAN EXPECT!! [I will now link two articles, written by me, in which I espouse this view. So by "lots of people," I mostly mean me - but I say this a lot, so I count as lots.]


rpr

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Re: 401k is a failure. They don't work
« Reply #12 on: March 27, 2015, 12:22:40 PM »
I do think that all

-- 401k plans should become mandatory
-- employee participation and employer  matches to be compulsory at a defined fixed rate of say 10% and 5% for employee and employer respectively.
-- All 401k plans must offer only funds with expense ratio less than 0.5%.
-- All contributions will be invested ONLY in some kind of fixed asset allocation say between 60/40 or 75/25 stocks to bonds
-- Withdrawals can only be made at age 60 and beyond
-- All withdrawals will be only in the form of a life annuity either single or joint

I know that this will significantly affect a majority of us including me on this forum planning to early retire but I'm sure that we are are resourceful enough to find other ways.


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Midwest

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Re: 401k is a failure. They don't work
« Reply #13 on: March 27, 2015, 01:15:42 PM »
I do think that all

-- 401k plans should become mandatory
-- employee participation and employer  matches to be compulsory at a defined fixed rate of say 10% and 5% for employee and employer respectively.
-- All 401k plans must offer only funds with expense ratio less than 0.5%.
-- All contributions will be invested ONLY in some kind of fixed asset allocation say between 60/40 or 75/25 stocks to bonds
-- Withdrawals can only be made at age 60 and beyond
-- All withdrawals will be only in the form of a life annuity either single or joint

I know that this will significantly affect a majority of us including me on this forum planning to early retire but I'm sure that we are are resourceful enough to find other ways.


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Why?  You want a nice retirement, save.  You don't want to save, live on social security.

Lookilu

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Re: 401k is a failure. They don't work
« Reply #14 on: March 27, 2015, 01:40:41 PM »
I like how the majority of his arguments basically come down to "But I don't wanna."

Company doesn't have a match? GIVE UP NOW! YOU WILL BE POOR FOREVER! [Maybe just save 5% more?]

People with fat 401k balances don't borrow from them or cash them out? IMPOSSIBLE! I WANT TO SPEND ALL MY MONEY AND BE A MILLIONAIRE IN RETIREMENT!!!

The people with the highest 401k balance are the ones who have worked the longest and most consistently throughout their careers? BUT I HATE WORKING! LAME!

A 4.8% return? LOTS OF PEOPLE SAY 4% IS ALL YOU CAN EXPECT!! [I will now link two articles, written by me, in which I espouse this view. So by "lots of people," I mostly mean me - but I say this a lot, so I count as lots.]

Best.article.summary.ever.

rpr

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Re: 401k is a failure. They don't work
« Reply #15 on: March 27, 2015, 02:14:14 PM »
I do think that all

-- 401k plans should become mandatory
-- employee participation and employer  matches to be compulsory at a defined fixed rate of say 10% and 5% for employee and employer respectively.
-- All 401k plans must offer only funds with expense ratio less than 0.5%.
-- All contributions will be invested ONLY in some kind of fixed asset allocation say between 60/40 or 75/25 stocks to bonds
-- Withdrawals can only be made at age 60 and beyond
-- All withdrawals will be only in the form of a life annuity either single or joint

I know that this will significantly affect a majority of us including me on this forum planning to early retire but I'm sure that we are are resourceful enough to find other ways.


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Why?  You want a nice retirement, save.  You don't want to save, live on social security.

The government policies behind the 401k plan is to encourage a majority of the people to save for their retirement. Obviously, only a small fraction of the people are taking advantage of it. This implies that this policy is a failure for the majority of the people.  The intent of the companies using the 401k plans was to shift from defined benefits to defined contributions. Obviously, this hasn't worked for a majority of the people.   

Let's get rid of 401k plans and IRAs completely. No deferred compensation, no tax-deferrals. Would you stop saving if that were the case? I would think not.  Savers (like you and others on this forum) will save irrespective of the benefits of tax deferral.

Midwest

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Re: 401k is a failure. They don't work
« Reply #16 on: March 27, 2015, 02:48:43 PM »
I do think that all

-- 401k plans should become mandatory
-- employee participation and employer  matches to be compulsory at a defined fixed rate of say 10% and 5% for employee and employer respectively.
-- All 401k plans must offer only funds with expense ratio less than 0.5%.
-- All contributions will be invested ONLY in some kind of fixed asset allocation say between 60/40 or 75/25 stocks to bonds
-- Withdrawals can only be made at age 60 and beyond
-- All withdrawals will be only in the form of a life annuity either single or joint

I know that this will significantly affect a majority of us including me on this forum planning to early retire but I'm sure that we are are resourceful enough to find other ways.


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Why?  You want a nice retirement, save.  You don't want to save, live on social security.

The government policies behind the 401k plan is to encourage a majority of the people to save for their retirement. Obviously, only a small fraction of the people are taking advantage of it. This implies that this policy is a failure for the majority of the people.  The intent of the companies using the 401k plans was to shift from defined benefits to defined contributions. Obviously, this hasn't worked for a majority of the people.   

Let's get rid of 401k plans and IRAs completely. No deferred compensation, no tax-deferrals. Would you stop saving if that were the case? I would think not.  Savers (like you and others on this forum) will save irrespective of the benefits of tax deferral.

401k's and IRA's do encourage savings.  Most people participate by having either an IRA/401k or some variation.  That has worked. 

Companies would have eliminated defined benefit plans regardless as they are economically unfeasible for most companies. 

Some people choose not to save enough (not my problem). 

Not sure why you go from setting up a shadow social security to scrapping, but that's your perogative.
« Last Edit: March 27, 2015, 02:51:51 PM by Midwest »

rpr

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Re: 401k is a failure. They don't work
« Reply #17 on: March 27, 2015, 03:04:25 PM »

401k's and IRA's do encourage savings.  Most people participate by having either an IRA/401k or some variation.  That has worked. 
What's the median 401k balance? The median IRA balance? The very fact that these are low is telling you that people are not using them to save enough.

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Some people choose not to save enough (not my problem). 
Some Most people choose not to save enough (not my problem).

Yes, it is not a problem for you. Indeed, it is your prerogative to not  care about the rest of the people in our country but I do.

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Not sure why you go from setting up a shadow social security to scrapping, but that's your perogative.

My premise is that as the 401k is setup currently with optional contributions, only a minority is using it effectively for retirement. Thus it is a failure as it exists for a majority of the people. It either needs to go or it needs to change.

A question for you: Let's say the 401k and IRA did not exist. Would you stop saving for retirement?

ETA: Providing for this tax break costs money to the government. It isn't free.

http://www.cbpp.org/cms/?fa=view&id=4063

Quote
The Congressional Budget Office (CBO) estimates[4] that tax breaks for retirement contributions and earnings will be the second-largest tax expenditure over the next decade, costing $137 billion in 2013 and $2 trillion over 2014-2023.

This is certainly a wasteful expenditure on the part of the government especially if very few people are benefiting from it.
« Last Edit: March 27, 2015, 03:17:33 PM by rpr »

Jack

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Re: 401k is a failure. They don't work
« Reply #18 on: March 27, 2015, 03:40:13 PM »
Some people choose not to save enough (not my problem). 

It'll become your problem when the crisis comes to a head and the government decides to confiscate your money by force to bail out millions of destitute baby boomers (because remember, old people vote).

It really doesn't matter whose "fault" the lack of 401(k) savings is; it behooves wealthy people to fix the issue anyway. If their attitude is instead "let them eat cake," they might very well suffer the same fate as Marie Antoinette.

Indexer

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Re: 401k is a failure. They don't work
« Reply #19 on: March 27, 2015, 06:35:21 PM »
Considering the financial solvency of most pensions and SS for that matter... I'll trust in my own INDIVIDUAL responsibility any day. 

401ks are great retirement vehicles if the employee funds it correctly.

Suncoast

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Re: 401k is a failure. They don't work
« Reply #20 on: March 28, 2015, 05:05:01 AM »
All of these articles have the same point - avg. 401k balance is low therefore people are not using the plan.  However, my 401k balance is $16,000, right around the average, however I've only been in my job for 10 months and have much more in an individual rollover IRA.  Therefore, the conclusion relies on faulty data.

+1 My 401k balance would also be very misleading if you ignored my IRA that has been rolled over from previous employers.

seattlecyclone

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Re: 401k is a failure. They don't work
« Reply #21 on: March 28, 2015, 09:53:38 AM »
Exactly. Many people have low 401(k) balances because they don't save, true. Many others have low 401(k) balances because they change jobs every few years and would rather roll their previous 401(k) over to an IRA than invest it in their new employer's fund options.

Midwest

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Re: 401k is a failure. They don't work
« Reply #22 on: March 28, 2015, 10:34:02 AM »

401k's and IRA's do encourage savings.  Most people participate by having either an IRA/401k or some variation.  That has worked. 
What's the median 401k balance? The median IRA balance? The very fact that these are low is telling you that people are not using them to save enough.

Some savings is better than none.  The vast majority of people do participate in a 401k or IRA, they simply don't save as much as they should.  I would say some saving is better than none.  The vast majority of the population won't save the money if it's not tied up in a difficult to get to account.

Quote
Some people choose not to save enough (not my problem). 
Some Most people choose not to save enough (not my problem).

Yes, it is not a problem for you. Indeed, it is your prerogative to not  care about the rest of the people in our country but I do.

I didn't say or infer not caring about others.  I did say if you choose not to save enough for a great retirement than that's on you. Actions have consequences.

We have social security, it provides an average benefit of $1200 to $1300 per month.

http://www.ssa.gov/news/press/basicfact.html

That's not a great retirement, but given the rockstar lifestyle being advocated on this website for $25-30k a year, seems like a pretty good start.

If the average senior is getting 16k per year in benefits, they only need to have saved $225k (4% w/d rate), for each person to have $25k a year tax free.  My parents, who live primarily on ss, live pretty awesomely on $40k. 

In short, we have a retirement system for those that don't save.  It's called social security.

With regard to the other comment regarding confiscation, that will happens through means testing.  I don't agree with means testing because it punishes successful savers and will discourage savings long term.
« Last Edit: March 28, 2015, 11:02:25 AM by Midwest »

rpr

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401k is a failure. They don't work
« Reply #23 on: March 28, 2015, 11:37:05 AM »
Not withstanding the high savings rates of the members of this board, The data among the general population show that very few people save using the 401k and IRAs. Even the $225k figure posted above is not even closely reached by the median IRA and 401k balance. Most of the people who max the limits, 23.5k and 30k for ages below and above 50 are earning well above the median incomes in this country. The 401k and IRA tax deductibility comes at a cost to the taxpayer of   > $100B per year. This disproportionately  benefits those making incomes well above the median. Thus I think that this tax deductibility should be done away with.

(As an aside, I and my wife are one of those that do benefit from this deductibility and are in that category I mentioned above). But I would continue to save even if there were no tax deferred accounts.


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« Last Edit: March 28, 2015, 11:46:07 AM by rpr »

Midwest

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Re: 401k is a failure. They don't work
« Reply #24 on: March 28, 2015, 12:09:36 PM »
Not withstanding the high savings rates of the members of this board, The data among the general population show that very few people save using the 401k and IRAs. Even the $225k figure posted above is not even closely reached by the median IRA and 401k balance. Most of the people who max the limits, 23.5k and 30k for ages below and above 50 are earning well above the median incomes in this country. The 401k and IRA tax deductibility comes at a cost to the taxpayer of   > $100B per year. This disproportionately  benefits those making incomes well above the median. Thus I think that this tax deductibility should be done away with.

(As an aside, I and my wife are one of those that do benefit from this deductibility and are in that category I mentioned above). But I would continue to save even if there were no tax deferred accounts.


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$150 a month for 40 years @ 5% is $229k. Cut off your cell phone or drive an old car and get a sweet retirement. 

There is decrease  in revenue collected by the federal govt for that particular year due to the tax savings generated by these plans, a portion of that revenue, however, is collected in later years when the taxpayer removes the money from the tax deferred account.

Lastly, your post assumes the federal govt needs more tax revenue.  These plans don't cost taxpayers $100B a year, they reduce tax collections by that amount.  I would argue that's a good thing.
« Last Edit: March 28, 2015, 12:11:47 PM by Midwest »

rpr

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Re: 401k is a failure. They don't work
« Reply #25 on: March 28, 2015, 12:14:15 PM »
Midwest -- read about tax expenditures. They are the same as spending.


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rpr

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Re: 401k is a failure. They don't work
« Reply #26 on: March 28, 2015, 12:26:11 PM »
Then let's set the IRA limit at $1800 a year. Get rid of the 401k completely.


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Midwest

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Re: 401k is a failure. They don't work
« Reply #27 on: March 28, 2015, 12:36:31 PM »
Midwest -- read about tax expenditures. They are the same as spending.


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"But before you casually weave the phrase "tax expenditure" in to your next dinner party, Richard Burkhauser, an economist also at Cornell, has a warning. He calls the phrase “a very slippery concept.”

Burkhauser has a problem with the idea that by giving someone a break on their taxes, the government is somehow spending money. He says, that implies that money belonged to the government, when it works the other way around.

“People who've earned money in the marketplace have earned it. It’s their money,” he says. “And we collectively decide how much of our money, we are going to give to the government.”"

http://www.marketplace.org/topics/wealth-poverty/show-your-safety-net/whats-tax-expenditure-we-decode-controversial-budget-term

The attached summarizes our positions pretty well.  The bolded section sums up my sentiment.

Regarding your $1800 proposals.  Why don't we call it $20k and do away with all the testing and rules?  I assure you $20k a year is nothing to the truly wealthy in this country.  That will benefit the middle class more than the wealthy.

rpr

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401k is a failure. They don't work
« Reply #28 on: March 28, 2015, 01:01:28 PM »
Midwest-- you and I differ in our opinions. Let's agree to disagree.

Edited to add: on second thoughts, from that same article you linked

Quote
Whether you call them tax breaks, or tax expenditures, Burkhauser and Mettler agree that just like other parts of the safety net, these things transfer money from one group to another. But unlike other parts of the safety net, the money often flows from poorer Americans, to richer ones.

So we actually agree on this.

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« Last Edit: March 28, 2015, 11:59:19 PM by rpr »

MgoSam

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Re: 401k is a failure. They don't work
« Reply #29 on: March 31, 2015, 08:22:35 AM »
Yes, I suppose my car doesn't work if I don't turn the ignition on....

libertarian4321

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Re: 401k is a failure. They don't work
« Reply #30 on: March 31, 2015, 09:10:49 AM »
Quote
"I'm not saying defined benefit plans are flawless, but they certainly didn't put as much of the risk and responsibility on the individual," said Terrance Odean, a professor of finance at the University of California, Berkeley's Haas School of Business.
holy crap! individual responsibility! oh noez!

It's downright un-American!

In America, we expect others to subsidize our lifestyle!

Midwest

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Re: 401k is a failure. They don't work
« Reply #31 on: March 31, 2015, 11:36:30 AM »
Midwest-- you and I differ in our opinions. Let's agree to disagree.

Edited to add: on second thoughts, from that same article you linked

Quote
Whether you call them tax breaks, or tax expenditures, Burkhauser and Mettler agree that just like other parts of the safety net, these things transfer money from one group to another. But unlike other parts of the safety net, the money often flows from poorer Americans, to richer ones.


So we actually agree on this.

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I don't agree with that, so lets just agree to disagree (just because its the internet doesn't mean one of us has to win)  LOL
« Last Edit: March 31, 2015, 11:41:06 AM by Midwest »