401(k) and the Financialization of Retirement

Thanks very much for joining us, Teressa.


JAY: So while privatization hasn’t yet hit Social Security, it has hit much of American seniors’ retirement funds. So what exactly has been happening?

GHILARDUCCI: Well, over the past 35 years, the United States has embarked on an experiment. And the experiment I like to call the do-it-yourself retirement system. So that experiment was aided and abetted by employers and by Congress and many presidents that enabled a transformation of people’s pensions from what’s called a defined benefit or a traditional pension, where your pension was based on your years of service and your salary at the time. The employer made contributions, but of course workers gave up implicitly some wages so those contributions could be made. But when you retired, you knew that you would get a set amount of income for the rest of your life. It was paid in an annuity.

And over time, workers’ bargaining power, because a lot of unions had been lost and a lot of new big employers came on the scene, like Walmart, that never had a traditional pension, just had what–the system is called a 401(k) system. That system was built in the 1970s for executives to put on top of their defined benefits system, and it’s a way to save pretax money at work into basically a whole suite of mutual funds that are chosen by your employer. So the idea is that you, as a worker, trigger a contribution from your employer into your 401(k), and then your employer chooses a bunch of investments that you can invest in.

And then you’re on your own. You decide where to put your money and how much money to put in that retirement plan. If you leave, you can take the money with you, or you can keep it at your company, or you can withdraw it–and a lot of people do. And in many companies, if you have a hardship, you can withdraw the money.

The whole structure of this system has been played out. We’ve seen how it has happened in the past 35 years. And the whole structure at almost every point has a fatal flaw. And so now older workers are going into retirement with not enough money to maintain their living standards and actually not enough money to live as well, relatively as well as their parents or grandparents. So I am looking at and many other researchers are looking at a real retirement crisis [crosstalk]

JAY: Well, hang on. Before we get into that further, just explain just what’s wrong with the 401(k). The basic issue is that it’s shifting, basically, a risk, essentially, of the stock market onto individuals who, one, have no experience to make these kinds of decisions. And why should you risk your retirement income?

GHILARDUCCI: So if you’re lucky enough to have a 401(k) system–and I’ll go back to that part–you are required to decide what Wall Street fund to put your money in and what amounts and, you know, what proportions. So all of a sudden, instead of having your company’s pension fund managers manage your money professionally, you, whether or not you’re an insurance agent or a professor of humanities or something else, you’re required to actually invest your own money. It’s as if the country said, okay, for the next 35 years, you have to pull your own teeth or you have to do your own electrical wiring or you have to do your own home building. You are asking people to be an expert in areas where we’re not trained.

You know what that means? That means you have the same results as you would if we pulled our own teeth or did our own wiring. We have a lot of botched up portfolios out there, and people are paying very high fees to Wall Street firms for mutual funds they should never have had anyway. So that’s one big problem with a 401(k).

JAY: And why should your retirement be linked to speculating on Wall Street anyway? I mean, this is a great boon for Wall Street. It opens up all the fees and all the money for them to take that money and then go speculate with it. But we saw what happened in 2007 and 2008, how great they are at making these kinds of speculative decisions, and then people have lost their retirement…



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