Consider yourself warned
Maybe you saw the headline the other day about how market losses have vaporized $2 trillion from Americans' 401(k) and pension plans.
What you probably didn't see was this: A proposal to vaporize the tax advantages of 401(k)s.
Well, "proposal" is probably giving this more credit than it deserves. It emerged during the same Congressional hearing where that $2 trillion figure was revealed. The chairman of the committee holding the hearing appears to have suggested this off the top of his head. And as the journalist Linda Ellerbee once quipped, ideas off the top of one's head are like dandruff — small and flaky.
But please, don't take my word for it. Here's the account from the hearing room:
A wide range of sweeping changes to the 401(k) system were proposed Tuesday at a hearing on how the market crisis has devastated retirement savings plans.
Chief among them was eliminating $80 billion in tax savings for higher-income people enrolled in 401(k) retirement savings plans.
This was suggested by the chairman of the House Committee on Education and Labor.
“With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said.
“We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings.
Let's be absolutely clear about what's going on here: Under the guise of "protecting" people's retirement savings from market losses, a veteran Congressmember is suggesting that you [unless you fall outside his definition of "higher-income," heh-heh] should no longer be allowed to make tax-deferred 401(k) contributions. Because to the mind of a Congressmember, the tax money you defer doesn't really belong to you. It belongs to the government to spend on its wars for the military-industrial complex and its bailouts for the financial-insurance-real estate complex.
Of course, this raises all manner of unanswered questions. Does this apply only to future 401(k) contributions? Or will existing holders of 401(k) accounts be required to fork over taxes based on the current value of the account? Will that be in one lump sum, or spread out across a number of years? Will this apply to IRAs as well as 401(k)s? And what about folks in the Roth IRAs and 401(k)s who made their contributions after-tax? Will they have to pay a second time when they withdraw?
But that's the great thing about speaking off the top of one's head. You don't have to provide details.
Oh, and what, pray tell, might replace the present system? Here, we do have a bit of an answer. We return to the hearing room:
Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York.
When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan.
“The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks,” which goes to the highest-income earners, Ms. Ghilarducci said.
That simply results in transferring money from taxed savings accounts to untaxed accounts, she said.
“If we implement automatic [individual retirement accounts] or if we expand the 401(k) system, all we’re doing is adding to this inefficiency,” Ms. Ghilarducci said.
I wish I'd blogged about this so I could trot out the proverbial I-told-you-so, but alas it's something I've shared only in inter-office correspondence. So you'll just have to take my word for it: I figured the day might come when someone would start floating proposals forcing people to dump a portion of their retirement savings into T-bills or savings bonds. Granted, that's not quite what the professor is talking about here with her "trade-in" proposal. But make no mistake, we've started our way down the slippery slope.
Consider yourself warned. What might be an idea off the top of a Congressmember's head now could easily become legislation next year.
[Hat tip Prof. Michael Rozeff at the LRC blog]
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Holy Cow! Forced to invest in the government! It’s like being asked to plan your own execution!
Comment on October 10, 2008 @ 11:58 am
Um, isn’t forcing people to invest in government debt called taxation? There is already a Ponzi scheme that forces you to contribute to a government “lockbox” which will payout to you when you retire.
Comment on October 10, 2008 @ 2:00 pm
Stop contributing and buy physical gold and silver. When it goes up during retirement you sell and tell government nothing! No taxes on your “profitsâ€! If they pass this crap watch everyone go for the exits on these 401Ks and IRAs. Hell, we might as well take the money out now and take the tax hit at today’s rates. Taxes will be much higher in the future. That is the only government guarantee!
Comment on October 10, 2008 @ 2:28 pm
We all know how this movie ends, don’t we fellas? Just dust of the Bible and look through Revelation.
That’s where we are now.
Comment on October 10, 2008 @ 2:53 pm
No. Actually I don’t know how it all ends ! But I think it involves a clown and an elephant and a grey hound bus and lawyers.
Comment on October 10, 2008 @ 4:19 pm
Then government is going to outlaw gold just like FDR did. Then they will use their drug inforcement technics to hunt down all the gold (breaking and entering without warrants, just claim the dog smelled gold in them thar homes). The judges will back all the new edicts, they always do. Anyone caught holding gold will be treated like a crack dealer, shackled and sent to the arctic circle work camps.
Comment on October 10, 2008 @ 4:29 pm
And you bet the band will play on and on and on……
Comment on October 10, 2008 @ 5:24 pm
you were warned at the inception of any government program.
Comment on October 10, 2008 @ 5:36 pm
well time for a revolution, boyz, no?
Comment on October 10, 2008 @ 6:10 pm
Why did the Gov. begin to sell gold and silver bullion coins in 1986? Could it really be that the Gov. will declare ownership of such illegal? If gold and silver coins are confiscated, will we receive compensation(worthless dollars)? What happens to all the cash the Gov. collected after two decades of selling bullion? Could this have been a giant scam? Sell all of the gold in Fort Knox and then confiscate it, what a plan! This means gold and silver coins will never be able to be used as a medium of trade and therefore will not serve as insurance against social and economic upheaval. What possibly could?
Comment on October 10, 2008 @ 6:45 pm
I recall several years ago the Zimbabwe Government enacted a law requiring retirement funds to invest some 40% of their money in government bonds paying 140% p.a. -inflation at the time was about 700%. Perhaps Ms. Ghilarducci could go to Zimbabwe for a very extended fact finding mission.
I imagine Rep. George Miller must be grateful to the government for his generously subsidized lifestyle by choosing not to tax him 100% of his (or is it their) money.
Comment on October 10, 2008 @ 7:07 pm
Here’s the link http://www.zimbabwesituation.com/aug31_2003.html#link7
Comment on October 10, 2008 @ 7:19 pm
The problem with capitalism (as practised in USA) and communism is centralization. When too much centralization occurs lots of people find it more easy to exploit the system by being nearer to forces of authority (or other over-confident hustlers), rather than add value. Pretty soon the fools entering the bottom of the pyramid will see less benefit in working hard. A good deal of people will be affected as things unravel, but we can reverse this trend over time, and get people back to doing real work. Most “experts” don’t consider this a virtue, but in India it used to be very hard for an individual or family or company to grow beyond a point, they usually get isolated, and are forced to reduce their growth and contribute to others or hide their wealth and live an outwardly simple life. In fact this lead to a richer and varied life, unlike in the US where the dollar is regarded as the only definition of wealth.
Comment on October 10, 2008 @ 9:10 pm
“Every normal man must be tempted at times to spit on his hands, hoist the black flag and begin slitting throats”.
H.L. Mencken
The Pirates sailing the good ship Inflation jest forgot to careen the ship and scrape her for worms. She’s stove now and all hands on deck are pooched.
The peg-brained Capitan is a tad way-layed though….indisposed is the polite term I believe,……he’s barricaded in his chart room freebasing pretzels.The first mate, ole Stinty is up in the Fo’c’sle
screaming “pulll…..PULL” and all around, folks are backing away with prudence.
Comment on October 11, 2008 @ 4:17 pm
I realize these are heady times but some of you might want to cease and desist from advocating criminal acts on the blog our hosts are kind enough to provide for us.
The amount of gold in private hands, other than jewelry, is miniscule. They will not bother to to try to call it in. They just won’t. Much easier to just catch it where it reenters the system as cash or assets that are traded and tax the bejeezus out of anybody who has any bejeezus left, whether it’s gold, cash, whatever. FDR never sent goons door-to-door. He didn’t need to. Neither will the next president.
Comment on October 12, 2008 @ 12:24 am
FDR did outlaw gold though. I don’t yet but will in the next year have assets outside US jursdiction. “Homeland defense” war on drugs, mess-o-potamia, “Patriot” act all look very bad for us. It’s amazing how far into the future some writers were able to see fifty years ago, fahrenheit 451, the forever wars of Bradbury and televisions on all the walls…
The problem is where to go. Europe doesn’t seem all that good, perhaps South America
Comment on October 13, 2008 @ 8:39 am
I haven’t decided yet but it certainly doesn’t seem like a bad idea to get money out of a retirement account. You don’t pay taxes before you save it but you do lose some control over your money.And, they can always change the rules after the fact. The other argument I have against the 401 is that it helps hide inflation. You keep your money out of general circulation and put it in “the market” helping to keep prices of real stuff suppressed and the stocks artificially up in price.
Comment on October 13, 2008 @ 8:42 am
One last post, as a question. People say that China has the power to set US interest rates as it controls so much US debt. Can’t the Fed just buy debt from the treasury at whatever rate they want and thus make interest rates whatever they want? It would be incredibly inflationary and private savers wouldn’t loan at those rates but banks might. After all, if you’re loaning out hallucinated money, any interest at all will provide an infinite rate of return.
Comment on October 13, 2008 @ 8:46 am
well this is really forceful investment
Comment on October 13, 2008 @ 9:24 am
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