Are 401(k)s the GOP's Secret Weapon?

Human Events, Apr 24, 2006 by Lambro, Donald

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.

Introduced in 1981, 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.

Since 1990, total worker assets in 401(k) plans have grown by an average of 13% 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-funds industry.

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

Increased Savings

The conventional view about savings is that its rate has been in decline 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 formula.

"There is now a belief it has increased savings, particularly among lower-income households," said 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."

"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 1999 to more than $91.000 by the end of 2004, owing to consistent worker contributions compounded by increasing stock values.

All this has profound political implications as well. "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.

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

Gallup Poll editor in chief Frank Newport said 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. 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.

When ICI economists calculated the effect of automatic enrollment, their test model projected that 401(k) participation would rise to 92% 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 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 reform. But expansion of the 401(k) ownership universe would breathe new life into his plan to turn working-class investors into conservative tax-cut voters.

Mr. Lambro is chief political correspondent for the Washington Times.