Tuesday, October 28, 2008

Slashers: Congressional Style

Curious as to what a veto-proof Democratic Congress may look like? In keeping with the spirit of Halloween, a couple of Democratic Congressmen give us a peek at coming attractions.

Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.
House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.

“Overhaul”… “Obliged”…? Hmmmm. It does have a softer tone than “wreck” and “forced”, though, doesn’t it?

Let’s break this down to the basics. We are in debt. We are massively in debt and face even more debt as we contemplate bailing out the auto industry and depending on who’s getting sworn-in in January, toy with the idea of universal health care amongst all other manner of foolishness. And who’s going to pay for all this goodness? Well, you are, of course….. but how? For one, by Congress getting their hands on the estimated $2 trillion of estimated revenue over the past 15 years lost to the government because of tax-deferred savings accounts.

But don’t worry, Teresa Ghilarducci of the New School for Social Research (that title alone has train wreck written all over it) has got a plan. In return for wacking our 401(k) tax deferment, we would receive a $600 annual inflation-adjusted subsidy (read: a, hey, no hard feelings, bub “government kickback”) in return for being “obliged” to “invest” 5 percent of our pay into a guaranteed retirement account administered by the Social Security Admin which would pay a whopping 3% a year, adjusted for inflation.

Now, if you are thinking, “Gee, Beers, that sounds suspiciously like something we are “obliged” to pay into already that is administered by the SSA”, you would be entirely correct in that assessment but Ms. Ghilarducci, who has been testifying to this effect in front of Miller and Baghdad Jim, frankly doesn’t give a damn what you are thinking.

“I want to stop the federal subsidy of 401(k)s,” Ghilarducci said in an interview. “401(k)s can continue to exist, but they won’t have the benefit of the subsidy of the tax break.”

Under the current 401(k) system, investors are charged relatively high retail fees, Ghilarducci said.
(ed.: what this statement has to do with anything relative to what she is proposing is lost on us)

“I want to spend our nation’s dollar for retirement security better. Everybody would now be covered” if the plan were adopted, Ghilarducci said.
She has been in contact with Miller and McDermott about her plan, and they are interested in pursuing it, she said.


Its so nice to know that someone much smarter than us has got our back whether we realize it or not.

Unfortunately and despite what Ghilarducci has to say, 401(k)s will cease to exist if this plan is implemented because that big fat tax deferral at the front end of the paycheck along with the employers’ matching contribution is perhaps the biggest reason why people got into 401(k)s in the first place.

But all that, with the corollary benefit of depriving the federal government trillions of dollars while pumping the same into the private sector.... gone come January.

Think about it.

Exit question: How long is it before Congress starts talking about eliminating the home loan interest exemption?


K T Cat said...


We would have more economic growth if the savings rate wasn't so high. We need to decrease tax incentives for savings and increase tax incentives for borrowing.


Anonymous said...

Say, doesn't that look a lot like Sen. Steven's place? Perhaps his contractor as well? No wonder it needed the remodel.

- Shank Piston Palin Wondering How Those Socialist Alaskans Don't Get Called to the Carpet for "Redistribution of the Wealth" With Their $1,100 Annual Checks From The State Government For Oil

Anonymous said...

I think this plan to redistribute my retirement nest egg is outrageous. My points of contention are:

- A government plan would have a return of 3%. The long term return on the S&P 500 from 1950 to 2007 was 11.8%. The returns from the proposed plan are obviously inferior. A knee jerk reaction to a cyclical movement in stocks is a call to panic and not to reason.

- The Ghilarducci plan would mandate 5%. But a worker making 50-100,000 a year could save up to 15,500, vs. the 2,500 - $5,000 under the Ghilarducci plan. Seems like a disinsentive to save

- All contributions to a 401K plan goes to the participant or their family. Under the Ghilarducci, when the participant dies, the family only gets half of the contribution.

- Ghilarducci claims that the government could run retirement plans more cost efficiently. Really? The cost on my Vanguard SP500 fund is 0.19%. How will the government beat that?

- Ghilarducci claims that the 401K plans are unfair. Really? Individuals not part of a 401K plan can contribute tax differed income to IRA plans if they chose. Also, the 401K plans are capped at $15,500 for 2008, so an employee making more money can't contribute more than the lower level employee. Seems fair to me.

- By moving retirement funds away from the capital markets, such a plan would cause a reduction in the equity and bond markets and reduce the amount of available funds for capital expansion and development. The Miller / Ghilarducci plan does not seem to consider those impacts.

- Under my personal retirement model, applying the Miller/Ghilarducci's plan pushes my retirement back at least 5 years to 70.

- I do not want the US Government managing my retirement. This is from the same management that brought us a Social Security plan that is targeted to go bankrupt by 2041, a FannieMae/FredieMac program that will cost the US taxpayers at least $200 billion, the $13 billion bailout of Amtrack and other wonderful programs too numerous to mention.

If the government wants a fair retirement plan, the answers seem pretty simple:

- Raise the annual tax deduction for IRA contributions from non-401K recipients to the same level of 401K plans, currently $15,500

- Allow spouses of 401K recipients that do not have a 401K plan to contribute up to the lesser of $15,500 or the gross income of that spouse in IRA investments

- Require the plan participant to sign a waiver when investing outside of indexes or when their equity allocation exceeds a given "safe percent" at the given age.