The Enron scandal is an epic event stirring outrage in Washington, Wall Street, and Main Street. But nothing Enron's disgraceful management did has stirred more anger than the financial disaster it inflicted on its employees retirement plan. Thousands of Enron workers held much of their savings in Enron stock and, barred from selling their holdings, watched helplessly the devastation of their nest-eggs as the company collapsed into bankruptcy.
Congress should make reforming 401(k) plan rules a top priority. Both modern finance theory and common sense demand strict limits on how much any pension plan should be at risk to a single company stock. Diversification is a bedrock principle in investing.
But Congress and the Administration should take advantage of the Enron debacle to go much further with pension reform. The real retirement policy failure is the millions of workers who don't have access to a 401(k)-type plan at work. Here's a number to put the problem in perspective: Only half of private sector workers aged 25 to 64 participated in an employer sponsored pension plan in 2000.
The late Robert Eisner, a brilliant economist, proposed an intriguing solution to the problem. He suggested a voluntary, supplementary Social Security program that offered workers a few simple investment choices. Here's how his vision of a national 401(k) would work. Everyone in the Social Security system would get the option of making tax-deductible contributions to the trust fund. The money would go to an individual's account. Contribution ceilings would parallel 401(k) limits. The menu of investment choices would be simple and sparse: A broad-based equity index fund, a bond index fund, Treasury securities, and any combination of the three. This savings scheme could substantially increase the pool of workers with retirement income.
The need is there. A standard financial planning formula is that people need about 80 percent of their pre-retirement income to maintain their standard of living during their golden years. Contrary to common perception, Social Security is not enough to prevent a decline in economic well being for many low-income workers. A recent calculation by researchers at Boston College showed that Social Security replaces only 55 percent of pre-retirement earnings for workers in the lowest fifth of the income distribution. (The data for this commentary comes from Alicia H. Munnell, Annika Sunden, and Elizabeth Lidstone in "How Important Are Private Pensions," a February 2002 Issue in Brief. The report is available at www.bc.edu/bc_org/avp/csom/executive/crr/.)
Clearly, the need for pension reform goes far beyond the Enron disaster. But why not take advantage of the scandal to truly overhaul the system. That way, at least some good comes out of the Enron cesspool.
