Issue 144 National 401K August 16, 2013

What would happen if we created a national 401K? Would it help people to have a better financial safety net? Let us review the cost and benefits.

Benifits1: What is good about a national 401K is that it is an investment. Basically it is taking money and investing in businesses on the stock market. This allows for a high rate of return when it comes to investments (especially risky ones if done early on). A 401K type retirement system is already in place in Galveston Texas where they on average have a larger payout greater than if they would have been in the traditional Social Security system. Of course theirs is managed in such a way that they will almost never lose money on the market due to the use of safe investments like mutual funds and bonds. Of course riskier investments can be done early on before a certain age to maximize your financial investment in the short run. Then it would be converted at a certain age, such as 10 years before retirement, to avoid losing all the money. Here it is insured that you will get lots of money.

Benifits2: A second benefit is that by investing in the stock market through this approach you actually help businesses grow. Basically you now have an entire population investing in the market which in turn increases the amount of capitol a business has access to. As such the business grows and in turn raises the value of the stock, thus raising the amount of money an investor makes. As everyone would now be invested in the market that means everyone gets more money when the business expands and does well. It becomes a cyclical relationship. The more you invest, the better able a business can expand and thus make you more money.

Benifits3: Another great benefit is that your money is in an actual account and as such the government cannot take away your money like with the Social Security system in the United States. By the way, the money in the Social Security system does not actually belong to you, which is why they can do that (see Supreme Court case: Flemming versus Nester for details). Also, it does not take much to run this system as it would use the tax code to put a portion of your taxes into the 401K account and would be group managed with everyone else’s investments to insure finical security through a singe body of "experts." A very simple system indeed.

Costs 1: The investment can still fail. Even though the money to be invested will be divided up among a large group of investments, a market crash can still cause a lot of problems. Thankfully, such crashes usually occur twice in a person’s life time and if you are switched to a safe investment within the age window prior to retirement then you are less likely to be hurt, and also well in a position to recover. We as investors will also have to deal with poor performing businesses and bad management of a business, but with diverse investments, financial loses can be easily mitigated. Such financial collapses and bad CEO's can be hard to deal with and some money will be lost, but through stock diversification and changing over to safer investments as you get older help to reduce much of the risk involved our retirement money will be very safe.

Costs 2: We have one big issue however. It will be the government managing the system. As such it will be a compulsory system which you probably cannot opt out of. In addition, the experts needed to run the system may not be very good. Let us face it, politicians suck at picking people to run different aspects of government. Poor management can be mitigated by having strict standards for experience when finding people to run the system, but they are bound to make a mistake at some point, or face political pressure to invest in certain businesses that may riskier than what even private investors will not touch. As such it will need to be insulated from politics and that means full autonomy. Therefore the only possible true negative is that the government would make it a compulsory system to save. But if you are willing to live with that, then it should be a fairly safe system.

Conclusion: This idea is not entirely out of the realm of libertarian thought. But I am against it unless it is used to replace the current Social Security system along with those groups of people who are exempt like the rail road workers who have their own unique system. Government workers would also be forced to use this system as their sole retirement system as offered by the government so as to insure that their own self interest keeps our money safe both in the stock market and in business in general. They will not want anything to threaten their chances of a major payout at retirement. This may be the only viable replacement to any Social Security type programs as discussed repeatedly throughout multiple presidential elections in the U.S. So the question is do we switch to a system that costs almost nothing to run, with some risk for a high return, and run by government while the money belongs to us, or do we stick to the status quo? Your choice.