For decades, pundits have declared that Americans shouldn’t have to save for retirement in the casino of the stock market. They argued that individuals saving for themselves was too risky and that only a strong collective safety net could provide a secure retirement.
Those pundits have been proven wrong.
A recent Wall Street Journal story highlighted the hundreds of thousands of “401(k) millionaires” just at the Fidelity brokerage. Far from being a refuge just for the wealthy, individual retirement accounts have become a widespread and secure way to save for retirement. They have also become one of the main reasons for America’s national wealth.
In the decades after World War II, federal tax policy encouraged employers to offer what are known as “defined benefit” retirement plans, where companies promised to pay set amounts to their former employees after retirement. But in 1974 the government began allowing people to open individual retirement accounts (IRAs) for themselves, with no tax on the contributions. More importantly, in 1978, Congress added what would become the famous Section 401(k) to the US tax code, giving employers the option to support individual retirement accounts.
Around the time of the 401(k) tax code change, there were about 30 million defined benefit plan participants in the private sector, an all-time peak. That was nearly double the total in “defined contribution” or individual retirement plans, such as the 401(k).
Today, the number of active participants in defined benefit plans is down to about 10 million, but there are almost 90 million in defined contribution plans. Thanks to 401(k)s, the total number of workers with any retirement plan is at an all-time high, even accounting for population growth.
While many have lamented the decline of the defined benefit package, in one sense the market has spoken. People have moved away from stodgy jobs with strict defined benefits packages. One reason is that the government allows companies to wait up to five years before any of their defined benefits are vested, and companies often choose to vest such plans slowly, because the plans are quite risky for the companies themselves. Since the median length of a job in the US is about four years, defined benefit plans can leave employees at these companies without any savings at all.
The riskiness of defined benefits packages is demonstrated by the long history of their bankruptcies. The only reason those plans are not even rarer today is that they are supported by a government corporation that came along at the same time the IRA was created, the Pension Benefit Guaranty Corporation. Due to plan bankruptcies, the PBGC was tens of billions of dollars in the hole until an American Rescue Plan bailout in 2021 salvaged it.
In 2025, Americans held $13 trillion in defined contribution accounts, mainly 401(k)s, and another $18 trillion in individual retirement accounts not directly attached to employers. Most of those individual retirement accounts, though, came from “rollovers” of previous employer accounts into IRAs, showing the flexibility that comes from individual savings when people move or change jobs. In total, almost a quarter of all household financial wealth in America is in individual retirement savings.
Despite periodic cries about a retirement crisis, people with the option to save for retirement are saving a lot. Fidelity estimates that people with 401(k)s are saving over 14 percent of their income in them, including both employer and employee contributions. The median retirement savings for the recently retired is $200,000, which helps explain the all-time record net worth for this group. The amount of savings will go up as more people retire who only know of defined contribution accounts. The number of people with individual accounts at middle age is actually higher than it is for older groups.
Beyond the benefits to individuals, there are social benefits to individual retirement accounts. In countries with more expansive collective safety nets and social security, most people don’t have to save as much for retirement. Although for some individuals that could work out fine, for society as a whole, it can be devastating. Retirement is one of the main reasons people save, and savings are the main reason businesses can invest, and investment is the main reason economies grow.
Decades ago, economist Martin Feldstein showed that the Social Security system in the US reduces personal savings by anywhere from a third to more than half. Although the precise magnitude of this effect is debatable, the broader point is not: an even more expansive social safety net would further depress savings.
The proliferation and success of 401(k)s is one reason political pressure to expand Social Security has remained muted. Social Security is a necessary provider for those with limited savings or options, but there is broad agreement that the program requires reform. One sensible approach would be to limit payouts for individuals who already have substantial incomes in retirement—and here, again, 401(k)s will be central. Many Americans are entering their later years with sizable holdings of stocks and bonds in 401(k)s, and modest reductions in Social Security benefits for these groups would not be devastating.
The success of tax-advantaged savings accounts has arrived and should be celebrated. Yet that success has gone too far in one respect. The federal government now has not just tax-advantaged retirement accounts, but tax-advantaged savings accounts for higher education, accounts for K-12 education, accounts for health care expenses, accounts for funds spent on people with disabilities, and, most recently, accounts for the expenses of “emergencies” more generally.
The surprising proliferation of tax-advantaged savings accounts is moving much of the population into a system where their savings are not taxed at all, which is much to the good. But now families have to navigate how much money to put into each bucket and for how long, and what will happen if they don’t spend the funds or if funds from one bucket are needed for other expenses.
Ideally, the system could just stop taxing people’s savings and focus on taxing consumption.
In the meantime, believers in individual liberty should celebrate the success of the 401(k) and pray for more successes to come.
