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She Wants to Kill Your 401(k)

She Wants to Kill Your 401(k)

By Emily Cadei



Everyone agrees there’s an impending retirement crisis in the U.S. Could she solve it? 

By Emily Cadei

Being an economist isn’t often a path to fame, but Teresa Ghilarducci found her 15 minutes — and so much more — about seven years ago, when she went to testify before Congress on the intricacies of retirement savings. Overnight, she became a star. That is, if being branded “the most dangerous woman in America” or landing in the sight lines of a chorus of talk-radio characters counts as stardom. 

The moment was propitious, in a way. Stock market vagaries had gutted millions of Americans’ savings, and though Ghilarducci wasn’t exactly celebrating, the crash did validate two decades of work and “every single one of my predictions” about the dangers of 401(k)s, she says. Her alternative is bold: She’d chuck the tax break people receive when they put money into the retirement accounts known as 401(k)s and use the savings to create an entirely new system run by the government. Terms like “government run” and “eliminate tax breaks” are catnip to the right, and Ghilarducci became, for a time, its favorite scratch pole: The woman who wants to “nationalize” 401(k)s, and the like. 

If anything, Ghilarducci’s brush with notoriety seems to have galvanized her. And over the past couple of years, her ideas have gotten play in huge states with pension problems, like Illinois and California, and with major unions, like the UAW, on healthcare trusts. Senate Democrats have used Ghilarducci’s proposals as a springboard for their own plans. “Every candidate will talk to a pension geek,” she explains. And “that’s me.” It’s been reported that she’s among a group of economists advising all-but-announced presidential candidate Hillary Clinton. (Neither Ghilarducci nor Clinton staffers would confirm — or deny.)

Which would give Ghilarducci, who is 57 with a pixie-like face and a high-energy manner, a broader platform for her controversial ideas than ever before. The daughter of a single welfare mom, Ghilarducci maintains a strong, if often unfashionable, faith in an active government and a strong safety net. How else could she have made it from a dusty California town to tenure at elite universities (first Notre Dame and now the New School, where she directs the Schwartz Center for Economic Policy Analysis) to the ear of the presumptive Democratic presidential nominee? 

It is true that retirement savings have become a sort of sleeper issue. The first of America’s baby boom generation started turning 65 in 2011. By 2030, the entire generation will have crossed that senior citizen threshold. When it’s over, America’s seniors will have leaped from 13.7 percent of the population to 20.3 percent, according to a recent U.S. Census report. And we, as a society, are far from ready for that shift. “The current approach isn’t working, and she’s been a leading voice on where it’s falling short,” says Reid Cramer, a budget and economic policy expert at the left-of-center New America Foundation, where Ghilarducci has spoken in the past. 

In 1993 she wrote an op-ed headlined “Beware the 401(k).”

Few would dispute the notion that the U.S. faces a serious retirement crisis. Where the experts differ is on how severe it is and how it should be fixed. Andrew Biggs, an economist at the right-of-center American Enterprise Institute, says the best research shows roughly a quarter of Americans are undersaving for retirement. Ghilarducci thinks it’s more than half. To fix it, Biggs would solve some of the glitches around 401(k)s, reducing fees and making fee systems more transparent. Ghilarducci? She’d scrap the 401(k) altogether.

She’s been saying this for more than 20 years — in 1993, when the vehicle was in its infancy, she wrote an op-ed headlined “Beware the 401(k).” To her labor-economist eye, the 401(k) wrongly shifts risk from the employer to the employee and offers no guaranteed payout. Worse, the mutual funds where people invest are “pretty crappy products,” she says. Her alternative would “piggyback on top of Social Security” with a pooled fund Americans can contribute to, but is administered by the government. A certain rate of return is guaranteed. Would it work? No way, argues Biggs, who says government-administered plans face a problem of human nature: “Politicians want to promise benefits and they don’t want to pay for them.” That’s evident in some of the nation’s worst pension crises, in places like Detroit.

Ghilarducci’s take on government is different, colored by her childhood in Roseville, a town in the California foothills just up Highway 80 from Sacramento. Food stamps, welfare and government grants helped her through — all the way to a Ph.D. at U.C. Berkeley. “I find out after I take graduate classes that I happen to be a child of the peak of the welfare state,” she exclaims. That realization helped shape her policy beliefs and, according to some, gave her practice of the “dismal science” a very human touch. She has an “equally deep understanding of the impact of economic policy” on people, says Sandra Davis, a spokesperson for the UAW healthcare trust. 

For her dissertation, Ghilarducci studied how governments provide for aging citizens. To her, a country’s pension system “held the secret of the values and the power relationships of a country.” All the financial and benefit mumbo jumbo boils down to “decisions about intergenerational equity.” With millions of Americans hitting retirement age unprepared, and the financial security of Social Security in doubt, those are exactly the kind of decisions the next U.S. president won’t be able to duck. 

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