Unpacking the 401(k) confiscation rumor
DR readers might have been alarmed to read Dan Amoss' warning in yesterday's edition that, "Some in Congress are floating a proposal to steal your 401(k), sell the proceeds, and invest in 'government-guaranteed' retirement accounts." Alarming especially to folks reading about it for the first time. So let's go into a little more depth.
This blog was among the first to warn last month about a proposal to wipe out the tax advantages of 401(k) plans. During the last week or so, probably because of Mr. Obama's election, this has caught fire on the Internet. And like many things that catch fire on the Internet, people are inclined to present the issue in the most dire form imaginable. So a plan to wipe out the tax advantages of 401(k) plans has morphed into a plan to "confiscate" 401(k) accounts — probably because Argentina's government did something similar a few weeks ago.
Is it really a confiscation plan? Well, yes and no. Let's unpack some of the nuances, because only then will we have an indication how far this ugly thing might go.
During a hearing last month, Rep. George Miller (D-California), the chairman of the House Committee on Education and Labor, suggested that "high-income" earners be no longer allowed to make tax-deferred 401(k) contributions. Miller has since back-pedaled on this notion, and nothing has been put in the form of legislation yet. So the spotlight has now shifted to a proposal by the star witness at the hearing, an econ professor at The New School in New York named Teresa Ghilarducci.
She's unveiled the plan in conjunction with the left-wing Economic Policy Institute; it's available in .pdf form on EPI's website. The gist of it is this:
1) Wipe out the tax-deferral feature of 401(k)s because it's mostly the "wealthy" who enjoy that feature.
2) Force everyone to contribute 5% of their income to a "Guaranteed Retirement Account" (GRA) which invests entirely in government bonds and returns an inflation-adjusted 3% a year. Half of this "contribution" would come from you, half from your employer. It would be on top of whatever you "contribute" to Social Security. In exchange for losing the tax advantages of your 401(k) contribution, the government would graciously kick in an extra $600 a year to your GRA. As Mrs. Bakerman said on The Bob Newhart Show, "Isn't that nice?"
As awful as all of this is, confiscating existing 401(k) balances and converting them to GRAs is not part of the plan. Not now. In her prepared testimony to Congress, Ghilarducci said:
Short term, I propose that since 401(k) accounts and the like are financial institutions — the bank about where 38% of the workforce can intend to save for their retirement — Congress let workers trade their 401(k) and 401(k) - type plan assets (perhaps valued at mid-August prices) for a Guaranteed Retirement Account.
Short-term, then, this is voluntary. But long-term? That's the problem. Everything about this has a slippery-slope vibe that means you can't preclude the possibility of a forcible conversion of 401(k)s to GRAs. And yes, if that were to happen, if everyone's stock and bond holdings were liquidated in one fell swoop and switched into Treasuries, Dan Amoss is absolutely right — that would bring on a government-guaranteed depression.
Would our Congresscritters and the president do something that mind-bendingly stupid? Seems far-fetched. But there's that Argentine thing. So you can't rule it out. We'll be watching.
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[...] DR readers might have been alarmed to read Dan Amoss’ warning in yesterday’s edition that, “Some in Congress are floating a proposal to steal your 401(k), sell the proceeds, and invest in ‘government-guaranteed’ retirement accounts . More [...]
Pingback on November 12, 2008 @ 9:23 am
When our gov’t starts taking policy-making cues from the Argentines, we’re totally screwed anyway. Then again, with our $10 Trillion+ national debt, I guess Uncle Sam has already been following the Argentine model for a long time…
Comment on November 12, 2008 @ 10:00 am
Don’t bet against anything as the USGovernment thrashes about wildly going from bad to worse in scheming to preserve itself and the grotesque monster this economy has become.
Comment on November 12, 2008 @ 10:01 am
Plans like that reveal how we can never trust a legislature, or a bank since they sucker us into putting our savings there so they can get to it easily when the time comes.
Comment on November 12, 2008 @ 1:12 pm
The notion there is anything so “mind-bendingly stupid” that congress and the president, any president, would not contemplate doing it if they thought it would help them in the next election is just dead wrong - as they prove on an almost daily basis.
Comment on November 12, 2008 @ 1:36 pm
Was it a rhetorical question or a joke when you asked ” Would the Congress or our President do something so mind-bendingly stupid”?
Of course they would…in fact, it is the general MO of the government. We shall now watch as the government attempts to clean out whats left in our pockets with as many ways to tax us as they can without actually calling it a tax.
Very soon, there shall be announced a new monument in the form of a Gigantic Printing Press , festooned with gaily fluttering flags on the National Mall…by Claus Oldenburg and entitled: “Acting quickly because we have no choice”. Congressional Members and their White House confreres will be seen dancing around it in a ganja frenzy while wearing grass skirts, slamming their spears on their shields and sacrificing graven images of Austrian School Economists as they chant BAAL DEMANDS INFLATION, BAAL DEMANDS INFLATION. Benny Boy already has laid down the rules for the new Federal Cargo Cult with his paean to Helicopter drops of currency.
Comment on November 12, 2008 @ 4:05 pm
[...] Full story here. [...]
Pingback on November 12, 2008 @ 4:46 pm
I doubt the forcible conversions would occur, at least all at once. I think that the gov’t would try amending ex post facto the taxation of withdrawals from said accounts and jack up the rates, which destroys the wealth, but only for you and not the tax man. No data on whether this will encompass Roth IRAs or SEP IRAs and other retirement instruments. Clinton pushed for Roth IRAs, which are made with after-tax money, and include the perk of not being taxed on the other end when you’re cashing out your gains (if you managed to have any after this disaster). The IRS licked their chops to get their money early, but their rapaciousness will not be tempered by obeying the rules and quietly letting you have your winnings. They’ll push to change the rules and screw you coming and going.
I don’t see this gov’t retirement account as an “investment”, anymore than I see social security as a safety net for my (relatively) young self. It is a new 2.5% tax on the person and the company they work for. What you see on the other end is so decimated by inflation, that the “return” only looks like something compared with it’s pre-inflated contributions. $2500/month in benefits in 30 years sounds OK when you think about today’s prices, except that in 30 years the avg apartment rent might be $5000 dollars.
On another note, why is there still a cap on Social Security contributions for W-2 wages? The contributions stop at around $90,000. I see no redeeming feature in this, except that it protects fat cats even better. For what it’s worth, I think the chattering classes on the boob tube should take this one up and make Obama act on it. As long as any rich schlub can collect social security (like former president George H.W. Bush–c’mon, isn’t that $400,000 a year pension from being president enough), I think it should be taxed on all their wages.
Oooh! Another another point I just thought of: once upon a time, there was cash in the social security system. As it grew, many greedy congressmen saw a pile of gold being wasted on the unwashed masses. So they started borrowing it on the pretext of some “good for the nation”, pay down of other debts, porkbarrel, etc. In its place we got treasury notes, which are like IOUs except they aren’t written on cocktail napkins. Well, considering how things are going over at Treasury, I can’t be too sure that they aren’t written in brown crayon on cocktail napkins…now there’s no actual money, but lots of IOUs. How long before the same bait and switch is pulled again? Congress handles money about as well as a sailor on shore leave after 6 months at sea.
Comment on November 12, 2008 @ 4:50 pm
invisigoth -
when you have begun to make over $90k you will have probably worked hard enough and studied long enough to understand your faulty logic. there are many of us making north of $90k that could hardly be considered “fat cats.” i’m in my 30’s and am not expecting to see a dime of this in return.
what’s the redeeming feature of that?
Comment on November 12, 2008 @ 6:23 pm
Social Security was set up to be a “pension,” not welfare. The benefits you receive are proportional to what you put in. The yearly cap (adjusted for inflation) is set to maintain a maximum “pension” level without “spreading the wealth” shall we say to those who pay less. Removing the cap would destroy the illusion that Social Security is a pension and not welfare.
Since every dime ever paid into the system has already been spent, the point is moot. I’ve watched the yearly cap get closer and closer to my income as my real earnings adjusted for inflation decline, so making me pay more while not increasing my benefits (which I will never receive anyway) is just raising my taxes, pure and simple.
The government would just spend the extra money anyway, since they steal every excess cent from the Social Security “trust fund” every year.
Don’t raise taxes on anybody, especially as we head into the worst recession in decades. You don’t have to be a “fat cat” to make $90k, but it was lots easier to make more than the Social Security cap a couple of decades ago. The cap is 50% higher than the first time I exceeded it. My wages aren’t!
More people believe they’ve seen a UFO than believe they’ll ever receive a dime from Social Security. (That’s actually a fact!)
The sad thing is, they’re right, although not necessarily about the UFO.
Comment on November 12, 2008 @ 7:16 pm
I think most people would be better off if they stopped contributing to these plans and take the tax hit at today’s rates. Tomorrows tax rates will be much higher regardless. Buy silver or gold coins and watch them at a minimum keep pace with inflation, especially tax inflation. Sell tax free in the future and avoid the government and banks. IMHO.
Comment on November 12, 2008 @ 9:04 pm
Actually I’ve made over 90K for about a decade. I know it’s not enough to be debt and worry-free, but sadly that’s way above the norm. I was thinking of wages around 250K+ as fat cat country.
My actual wish is for there to be no social security and to have the freedom to be able to invest as I see fit. But from a realpolitik viewpoint, I see it as nearly impossible to phase out. I can’t even call social security a pension or welfare, it is a ponzi scheme.
What would you guys do in regards to social security?
My ultimate solution is to get away from wages entirely and just trade 100% of the time. Right now trading provides 30% of my income, but I’ll get there eventually. I’d gladly give up whatever future “benefits” I’d receive to get out from under that giant leech.
Comment on November 12, 2008 @ 10:50 pm
“Slippery Slope”:
Once many people have their Government Retirement Accounts set up, the Government will have complete say in running many people’s retirement planning. Among other terrible possibilities is that Social Security could become “means tested” and future social security benefits adjusted downward if the government determines that you already have enough in your GRA to live on!! People don’t realize how easy this would be able to be accomplished with complete control of congress with a Mandate for change.
Comment on November 13, 2008 @ 10:53 am
[...] writer was among the first to pick up on this story last fall and follow up as the story caught fire online. Rep. Miller has more hearings scheduled in the weeks ahead. [...]
Pingback on March 19, 2009 @ 3:39 pm