Vol 3, Issue 8. Quarter 1 – 2026.

I recently ran across a bit of the usual alarmist financial “News” that caught my eye. This particular piece was screaming that “the government is going to eliminate 401K accounts.” Aside from the fact that this is political suicide for anyone who pushes it, that is not what the uproar was really based on. This story line can be traced to an article by Daniel de Vise at USA today who was using a research paper from Biggs and Nunnell (2024)as source material to lay out a case for eliminating the tax shelter of 401K and similar accounts.

The argument stated a bit more calmly is this. The tax treatment of retirement account contributions in the US goes largely to the relatively wealthy. Roughly 59% of the benefit goes to the top 20% of earners. This may sound like it is highly skewed, but I would beg to differ. The average income of the top quintile is about 4 times larger than the average earnings of all Americans. The mean income for the top quintile is about $270,000, while the mean for the middle quintile is about $70,000. It would be almost impossible for most of the tax benefit to NOT go to this group. In fact, the limits on how much can be added to retirement accounts is the main reason that this gap is not much higher. If top earners could save as much as they wanted in such accounts, it is easy to see how they would reap 90% or more of the benefit.

Perhaps a bit of historical perspective is needed here. Many people think that section 401K of the IRS code was written to set up retirement accounts. Au Contraire. The truth is that the highest marginal tax rate in place at the time was 90%. In this environment corporate executives would “defer” part of their salary until after they retired. That way they could take an annual salary of $400,000 and split it into two years of payments of $200,000 each. This dramatically cut their total tax bill and gave them the ultimate pension fund while they could argue that the company had no such fund. In essence they could eliminate the pensions for all of the other workers, while creating one for themselves that was never called a pension. The government eventually caught on to the game and created section 401K of the tax code to eliminate this behavior. The contribution limits were not put in place to encourage savings. They were designed to increase tax revenue by limiting how much the execs could defer.

A benefits consultant named Theodore Benna came up with the idea of using this rule for lower paid workers in the form of retirement accounts. The IRS was consulted and agreed that the tax regulation did NOT make this illegal. Mr. Benna then created 20 such “401K” accounts for a small firm in 1980, and the 401K retirement plan was born.

In addition, the rule didn’t really accomplish much of its intended result. Companies found more creative ways to pay retired executives in the form of “Consulting contracts”, “Retainer fees”, and a host of stock offers and preferred shares.

What’s the Real Issue Here?

The fact that higher earners still get most of the 401K tax benefit was not really Bigg’s and Munnell’s chief issue. Their larger point was that the top quintile receiving most of the benefit are precisely the people who need it the least.  They argue that if the tax benefit were not there, this group would save for retirement anyway. Just like the executives found other ways to get paid after retirement, they would also save money in other accounts or by purchasing other assets.

The 401K benefit does not help lower paid workers nearly as much because when your marginal tax rate is lower, the benefit from the tax deferral is also lower. Thus, the tax break provides very little incentive for lower wage earners to save at all. These earners would get a much larger benefit if the tax revenue lost from providing the benefit to the top quintile could be captured and then used to increase the social security trust fund.  This would be a particularly effective use of funds because SSI benefits make up a much larger portion of income in retirement for the bottom quintile of earners.

This is a great idea on paper. However, it suffers from at least one fatal flaw. The paper argues that the government could eliminate the tax break on 401K contributions for high earners, take the increased revenue, and use it to shore up social security. I don’t know about you, but I am willing to bet all the money that I have that if the tax break was eliminated, the government would use the extra revenue to justify cutting taxes on that same top quintile to “stimulate the economy.”

“Instead of using the money as additional funding, legislatures have used the lottery money to pay for the education budget and spent the money that would have been used had there been no lottery cash on other things.”

Money is fungible – meaning that once I have control over it, I can put it into any account that I wish. When legislators get additional funds and the choice is between spending it on children or cutting their own taxes, its amazing how it always seems to end up going the same way.

However, I do feel that the paper raises an intriguing argument. Taxes will be raised to fund social security one way or another. This proposal is a clever way to raise taxes while claiming that it “taxes the rich” to fund the rest of us.  Pardon my cynicism but I hold severe doubts about the idea that rich congressmen and senators will all get together to raise taxes on themselves to save the rest of us. It ain’t going to happen.

Financial Media’s Track Record

Before we get too far ahead of ourselves in our reaction to the doomsday scenario of the day, let me close by reminding you of a classic article from Barry Ritholtz in 1979 in BusinessWeek – “The Death of Equities.” As this classic story explains,

“At least 7 million shareholders have defected from the stock market since 1970, leaving equities more than ever the province of giant institutional investors. And now the institutions have been given the go-ahead to shift more of their money from stocks – and bonds – into other investments. If the institutions who control the bulk of the nation’s wealth, now withdraw billions from both the stock and bond markets, the implications for the US economy could not be worse.” (ritholz.com/1979/the-death-of-equities/)

Sound familiar? Apparently, no one wanted stocks in 1979. They all wanted “alternative” investments. No one would buy stocks and bonds in this “modern age.” Perhaps you thought all of the current noise about alternative investments, gold, binary options, exotic futures contracts and other speculations including crypto-currencies was something new.

Consider what the S&P 500 has done since the printing of this “death of equities” headline at the end of 1979. If you invested $10,000 in the S&P 500 at the beginning of 1980, you would have about $1,209,700 at the end of 2023, assuming you reinvested all dividends. This is a return on investment of 11,998.47%, or about 11.61% per year. This beats inflation over the same period by 8.32% per year. If equities died in 1979, I and everybody else on the planet must has missed it.

The fundamental message is this. Doom and gloom scenarios are created to generate clicks. One day it’s the “End of equities.” The next day its “The end of the 401K!” In March of 2026 it is yet another war in the Middle East. This pattern isn’t new. Yes, the vocabulary evolves a bit. For example, no one used the phrase “alternative investments” in 1979, but the message is exactly the same as it ever was. And your response should be the same as well. I will invest as much as I can afford in equities, as early as possible, and leave it there as long as possible. The rest of the noise will take care of itself.