Encrypted email may protect users from the usual hacker, but probably not against a serious government investigation; A point that was proven by a recent event with the cooperation between Canada's government and hushmail.com.
Last week, encrypted email provider hushmail.com turned over 12 CDs full of email from three of its user accounts to the Canadian government. The transaction was due to an ongoing investigation on online steroid dealers.
Hushmail.com had been relatively safe from 1999 – when they started using encryption, but had no unencrypted messages in their servers – up until 2006, when the service radically changed to a simpler non-Java version, which transferred the encryption process to Hushmail's servers. With this change of tactic came the fact that hushmail obtained the passphrase needed to decrypt messages.
Everything would be fine, but the Canadian government was smart and asked for the passphrase together with the emails.
The moral of the story is: if you are planning a terrorist attack, do not write an email about it.