Wednesday, October 29, 2008

More on Democrat Plan to Emulate Argentina on 401(k) Accounts

Earlier, we pointed out an article in U.S. News about hearings in Congress on a plan to eliminate 401(k) account tax breaks to recapture the $80 billion dollars in taxes "lost" via these retirement accounts. We weren't kidding.

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.House Democrats Contemplate Abolishing 401(k) Tax Breaks, WorkForce Management, 10/16/2008

Yep, it just hurts the Democrat plans to redistribute wealth to their constituents too much! However...

A plan by Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York, contains elements that are being considered...Under Ghilarducci’s plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3 percent a year, adjusted for inflation...The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated....(Absolish 401(k) tax breaks, con'td)

Yep, instead of voluntarily contributing money for property that you have control over, you will be required to contribute a fixed amount. Mandatory volunteerism, anybody?

“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....”

Trust a professor from a hard left institution like the New School for Social Research to dictate her terms for how other people should invest.

This is what you're looking forward to?




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.

- The Miller / Ghilarducci plan caps contributions at $5K. Sorry, but I've been putting in $15K into my plan. I'd like to retire someday, thankyou.

- 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.

What's next, a plan to tax 529 savings? The average American citizen needs to save more. Penalties on those that do will not work. Expanding tax deductions on IRA plans would.

Anonymous said...

Most excellent response.