Dems & Obama consider move to kill 401(k)’s

If you’re employed in a salaried position these days, chances are your company offers you a retirement investment program called a 401(k). That’s a reference to the section of IRS regulations that deal with this particular kind of investment, one in which deposits get made to an investment account without being taxed first. As those funds are withdrawn years later by the then-retired investor, the gains get taxed at the presumably-lower tax rate applicable at the time. There’s more to it than that, of course, but that’s basically the idea. The point is to let you save for retirement and the 401(k) gives you a tax incentive to set aside that money rather than spend it today.

Apparently, there are Democrats who are thinking the 401(k) idea should be trashed and replaced with – shocking, I know – a government-run “trust fund” to handle your retirement accounts. I first noticed this story over here at HotAir and saw it again on Instapundit. Ed Morrissey at HotAir points us to this story over at WorkForce.com that goes into some of the details:

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. She testified last week before [Rep. George] Miller’s Education and Labor Committee on her proposal.

At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months.

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.

It’s hard to discern the exact meaning of that line about requiring people to invest 5% of their pay. Does that mean that unless I give over 5% of my paycheck, I can’t participate in the program? Or does that you I will give over 5%, by law, and I will participate in the program, period? My suspicion is the latter. Morrissey’s comment on this story cuts to the heart of one of the many issues with this approach:

That means your employer can no longer write off their contributions to your 401(k), and your capital gains would be taxable year-on-year.  In other words, it becomes just another investment or savings account, with no tax benefit at all, and no employer contribution.  Instead, Uncle Sam would give you your “matching” funds — up to a whopping $600 per year!  Whoopee!

As Michelle Obama says, you could buy a pair of earrings every year … except, of course, you can’t.  It’s in The Lockbox, defined by politicians as Locked Away from You but Accessible to Us.  It goes there along with 5% of your gross earnings, apparently to play with the 7% of your gross earnings that already goes to Social Security.  And what do they do with the money?  They give you government bonds as your only investment option.

The Instapundit link takes us to a U.S. News article by James Pethokoukis in which the author makes a few “respectful observations.” I won’t quote the whole thing here (and his article is frankly too good to excerpt much) but there are 2 items he mentions that the casual observer of this debate would miss. First, he points out that Rep. Jim McDermott’s (D-WA) concern that the savings rate in the US isn’t going up is true, but flawed. That rate McDermott refers to doesn’t count any gains made in equities you invest in. His example is if you bought $100 in XYZ Corp. and the company’s value doubled, the saving rate measure would still consider that $100, not the $200 it should be. In short, the savings rate ignores the value of the 401(k) investments and focuses only on the deposits.

The 2nd one of his several observations is one I will quote directly because it’s critical to the understanding of the mess the Democrats are considering:

[Prof. Teresa] Ghilarducci (ed.: the architect of this plan) would offer a lousy 3 percent return. The long-run return of the stock market, adjusted for inflation, is more like 7 percent. Look at it this way: Ten thousand dollars growing at 3 percent a year for 40 years leaves you with roughly $22,000. But $10,000 growing at 7 percent a year for 40 years leaves you with $150,000. That is a high price to pay for what Ghilarducci describes as the removal of “a source of financial anxiety and…fruitless discussions with brokers and financial sales agents, who are also desperate for more fees and are often wrong about markets.” Please, I’ll take a bit of worry for an additional $128,000.

As would I. As would lots of people I know. Add to that the near-certainty that the government management of this program would very likely be… well, the polite word is “flawed.”

In a nutshell, the Democrats are now openly considering enacting policies that cannot be considered anything other than socialist and they are licking their chops at the notion of a commanding majority in Congress along with a true-blue socialist in the White House to sign such policies into law. The effects will be devestating to your ability to plan for your retirement and they’re just getting warmed up. There’s all manner of things you’re doing right now that they think you should be relying on a government-funded program for. Be mindful of this as you consider the decisions you’re going to make in 10 days or so.