- The Washington Times - Wednesday, April 19, 2006

Of all the economic trends in our country today, none is more potentially far-reaching politically than the fantastic growth of tax-deferred 401(k) retirement accounts. This sector of our economy doesn’t get much attention in political and social-issues circles, but interviews with experts in this field reveal the often little-known or underreported effect 401(k)s are having and will have on our society and our politics.

Now in their 25th year, these investment plans have contributed mightily to the nation’s growing investor class, especially among middle- and lower-income Americans — broadening ownership of the economy, boosting the much-criticized savings rate, and, many now believe, making the country’s electorate more conservative in its voting behavior.

“The 401(k)s have done an enormous amount of good for the prosperity and stability of our country. When citizens have a vested interest in the economy and own more property (or investment assets), the more stable and politically conservative your society will be,” said Heritage Foundation economist Bill Beach.

The numbers are astounding and explosive: Since 1990, total worker assets in 401(k) plans have grown an average of 13 percent a year, from $385 billion to an estimated $2.1 trillion in 2004, the most recent year for which figures are available, says the Investment Company Institute (ICI) which represents the mutual fund industry.

More than 43 million U.S. workers participated in 401(k)s at the end of 2004, up from 10 million in the mid-1990s, about a third of the entire work force. On average, nearly 70 percent of participants’ assets in these plans are invested in broad-based, highly diversified stock mutual funds.

The conventional view is that the savings rate has been declining for years. But that long-held perception is changing as a result of 401(k) growth which has not been included in the savings measurement.

“There is now a belief that it has increased savings, particularly among lower-income households,” says Sarah Holden, an ICI economist. “If you have an account that is labeled 401(k), you look at it as something that is not liquid and that you can’t spend today. They are accumulating significant [savings] balances.”

Stocks can rise and fall with the economy, but 401(k)s have to a large degree been an anchor in the market because their owners are “a tough crowd who stick with it through thick and thin in bear markets,” Ms. Holden told me. “By year-end 2004, the average balance among 401(k) participants who had held accounts since at least 1999 increased by 36 percent, despite experiencing one of the worst bear markets for stocks since the Great Depression, rising 15 percent in 2004 alone,” according to a recent ICI study.

The average balance grew from $67,000 at the end of ‘99 to more than $91,000 by the end of ‘04 as a result of consistent worker contributions compounded by increasing stock values.

All this has profound political implications. “Investors, regardless of income, gender or race, vote more Republican than non-investors,” tax cut crusaders Grover Norquist and Cesar Conda wrote in a Wall Street Journal analysis about the effect of President Bush’s tax cuts.

Financial writer James Glassman helped launch a polling group called Investors Action Alliance that supports that conclusion. Its survey of 1,000 voters in the 2004 election found that among voters under 50, investors preferred Mr. Bush 51 percent to 43 percent, while noninvestors favored Sen. John Kerry 53 percent to 36 percent.

Gallup Poll editor in chief Frank Newport says there isn’t a lot of polling data to support this correlation. Still, he told me, “It’s possible that as we move toward what Bush has called an ownership society, it could change what’s important to Americans when they vote.”

That day seems to be coming and could be accelerated by a pension reform bill that passed the House last December by a 294-132 vote. One of its key provisions would encourage employers to automatically enroll new workers in 401(k) plans, making them regular investors unless they choose to opt out. That politically strategic provision, which has received little attention thus far, would turn most of the work force into investors with a growing stake in Wall Street and the corporate economy.

When ICI economists calculated the effect of automatic enrollment, their test model projected that 401(k) participation would rise to 92 percent of all eligible workers. Significantly, their study found that the “positive impact of automatic enrollment on participation rates proved even stronger among lower-income workers.”

These workers of course represent the core of the Democrats’ base that Republican strategists want to win over in future elections and they believe that moving them into the investor class is the way to do it.

This was the underlying political strategy at the center of the president’s ill-fated Social Security investment account reforms that crashed in 2005. But expanding 401(k) ownership would breathe new life into his plan to turn working class investors into conservative tax-cut voters.

It deserves to be at the top of a retooled, pro-worker, pension reform agenda.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.

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