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Leave Our 401(k)s Alone!
By JLP | November 14, 2008
Take a look at what Teresa Ghilarducci at New York’s New School for Social Research wants to do to your 401(k):
Her plan would end the tax breaks for 401(k)s; she proposes instead to give all workers an annual $600 inflation-adjusted tax credit for retirement and force them to invest 5% of their pay into a government-run retirement account managed by the Social Security Administration. She called the 401(k) “a failed experiment.” A McDermott spokesman called her proposals “intriguing” and “part of the discussion.” Mr. Miller hasn’t so far endorsed the plan.
Source: Targeting Your 401(k) ($), WSJ
Do we really want the government to manage our retirements?
There’s also been talk about the government confiscating 401(k) plans. I think that’s a little far-fetched. I don’t think that would happen. Afterall, it is OUR money and the government has no right to it.
Instead of drumming up stupid ideas, why don’t our politicians focus on what’s really the problem: LACK OF EDUCATION! Why don’t they:
1. Concentrate on fixing Social Security.
2. Educating the general public on the purpose and management of their 401(k).
We don’t want the government “looking out for us.” Trust me on this one.
Topics: 401(k), Retirement Planning |
November 14th, 2008 at 11:51 am
I thought she was pretty much the nutbar case in a whole mess of people who were testifying before congress? They invite people in; they don’t control what they say
November 14th, 2008 at 11:53 am
Anna,
True. But then a McDermott spokesman called the idea intriguing. Maybe he was just being nice.
November 14th, 2008 at 12:22 pm
When you say “There’s also been talk about the government confiscating 401(k) plans”, aren’t you referring to the minor story about a presentation the same woman gave to congress? I’ve yet to see anyone point to a congresscritter who actually supports this (correct me if I’m wrong), but there seems to be blog posts about this all over the money blogosphere.
November 14th, 2008 at 12:25 pm
Anon,
I have received a couple of emails referring to the confiscation question. I never said that any politician is in favor of the idea.
November 14th, 2008 at 12:47 pm
Amen. The government isn’t exactly the first entity I want managing my retirement plan!
November 14th, 2008 at 12:51 pm
In 1933 the US Government confiscated gold that was legally owned by individual investors(Ron Paul has a lot of good information about it). Why can’t they do it again, this time with our 401k’s? The difference is that this time it’s not to stop the hoarding of gold, but rather to pay for a gargantuan deficits over the next 4 years.
November 14th, 2008 at 1:09 pm
With the new dem prez, dem majority in congress, and possible filibuster senate, this is a scary story…
November 14th, 2008 at 1:29 pm
Quacks is what these people are if they think 401ks are failures. As for educating people about money, it’s a great idea and noble cause; too bad it’s fraught with difficulty.
People need to care about a topic before they seriously begin to understand it. There are just too many people (from my experience mind you) that don’t take a real interest in finance and fiscal responsibility. Net result is they let other people make these decisions for them; people that may make truly poor decisions.
And hey, if the government is already managing this much crap, why not add more to the pot. While we’re at it, lets raise the minimum wage to a million dollars an hour because hey, why stop at $6.50 when little Billy can live like a king if he makes 6 figures (sarcasm)
November 14th, 2008 at 1:46 pm
“Afterall, it is OUR money and the government has no right to it.”
That doesn’t stop them from taking it for Social Security or Medicare/aide. Both of those represent services that would be better left to the market (especially if the government would stop distorting, and allowing distortion of, the medical market [prescriptions, AMA licensing, etc].
So given that it being out money has never stopped them before, why should it stop them now?
November 14th, 2008 at 2:20 pm
I think that this idea is a non-starter and would be political suicide for any politician that touched it. But on the other hand, Argentina did pretty much what everyone here is fearing - they took control of people’s pensions to fund government operations. So it isn’t totally wack to worry about this.
November 14th, 2008 at 5:07 pm
If the US Government defaults on its debts you can kiss all those fruit, vegetable, electronics and pretty much everything that’s imported from overseas goodbye.
Do you want to starve or do you want the government to pay its debts?
I know, you think you have “money” saved away somewhere but what you actually have are worthless pieces of paper.
Gold on the other hand, is real money. I’d rather have my worthless 401k paper confiscated and used to pay off worthless paper debt; I’ll keep the gold and make my own deals with oversea suppliers
November 14th, 2008 at 7:17 pm
Education will be difficult as long as big brokerages, mutual fund companies, and insurance companies that sell and administer 401(k) plan are allowed to continue to promote market beating strategies like it the only choice and hide alarmingly high fees.
If government is going to step in, I’d rather see requirements for fully transparent fees and warnings on the additional risks of trying to beat out indexing. Just look at the retirement plan federal employees have compared to what most private companies offer.
November 14th, 2008 at 8:59 pm
The scarier thought (one not discussed) is where your Social Security benefits are reduced by a “means test”. Stated quite bluntly, if you were prudent and saved your whole life (while contributing to FICA, as if you had a choice), and you managed to get a few bucks up as a result, your social security would be then cut off or reduced.
I regard that as more of a threat than anything else. Read the fine print in your Social Security statement folks, it’s all just an estimate.
Yours,
Bozo
November 15th, 2008 at 12:59 am
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to
say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Betty
http://www.my-foreclosures.info
November 15th, 2008 at 8:23 am
…there are many creative ways for Potomac-Politicians to get hold of your 401(k) savings, other than outright confiscation.
Remember that ‘401(k) is merely a section of the federal Internal Revenue Code — and can be changed easily… at the whim of Congress.
Within the next 20 years there will be some grand plan to merge all retirement accounts into a single system. Social Security, IRA’s, 401(k)s, etc. will disappear into some type of new national retirement plan. Of course, any private “retirement” savings will be transferred (stolen) into this new Federal system.
Medicare, Social Security, and countless government & corporate pension-plans are all headed for bankruptcy. Your politicians are not gonna let that happen… while ignoring huge piles of cash in personal retirement accounts– readily available for the taking, with just a little creative legislation.
November 15th, 2008 at 9:15 pm
I’d be happy if they just paid their fair share of taxes.
November 15th, 2008 at 9:21 pm
poor boomer,
Who’s “they?”
November 16th, 2008 at 10:53 am
“They” are the people with a 401(k) who get a tax deferral.
I don’t understand why workers without a 401(k) or health insurance should pay a higher effective tax rate than a worker with either of these and equal compensation.
And I really don’t understand why someone earning $20K without health insurance or a 401(k) should pay more tax than someone earning $25K with a 401(k) and health insurance which reduces their taxable income.
November 16th, 2008 at 7:54 pm
JLP/American readers
I would love to hear your thoughts on a system similar to that we have in Australia
Essentially, under Australian superannuation the employer is obligated to contribute 9% of your base salary. The monies can be put into any superannuation fund, run by various private funds or alternatively, you can set up your own. In addition, the system allows for after-tax and pre-tax additions to the fund with various incentives (including govt co-contributions depending on income level). Superannuation is concessionally taxed which is always a plus when you the tax rate goes up to 45%
November 16th, 2008 at 8:27 pm
@ Poor Boomer, 401k’s are used to incent employees to save. If you want to lower your taxes, contribute to an IRA. Although the limit is lower, and obviously there is no employer match, it is a way to get started.
You also may want to look into the Retirement Savings Credit. See the following IRS links:
http://www.irs.gov/newsroom/article/0,,id=172969,00.html
http://www.irs.gov/formspubs/article/0,,id=177967,00.html
November 17th, 2008 at 2:39 pm
401k’s are indeed an unfair situation. My company doesn’t have a 401k plan, so I’m limited to saving for retirement with an IRA. What’s up? Why should 401k plans be tied to your employer?
November 17th, 2008 at 3:19 pm
@Jon - Why don’t you quit your current employer for one that offers 401k’s?
November 18th, 2008 at 12:18 am
There’s that word again, “unfair”.
November 18th, 2008 at 1:14 pm
Historically speaking, it’s interesting to see how salaries get reduced by a slow change of retirement benefits. In the 1950’s and 1960’s you have defined-benefit pension plans based on time of service with the company, etc. These are in addition to the salary and are part of the overall compensation for labor. In the financial turmoil of the 1970’s, with high rates of inflation, these pension plans become much less attractive, so employers introduce 401k-type plans, to be used in addition to pensions. These new plans are to be funded by taking withdrawals directly from the paycheck. Since these plans invest directly in various types of securities, they are touted as something that will keep up with inflation. Consequently the defined-benefit pension plans, which an employee got in addition to the paycheck, slowly disappear during the 1980’s and 1990’s with the understanding that inflation makes them a less reliable source of retirement funds than a 401k. Note that there is a changeover period during which both 401k’s and defined-benefit plans exist. This makes it less obvious what is happening as time goes on and defined-benefit plans go away, forcing many employees to fund their retirement entirely from their paychecks. Now, today, we have deflationary financial turmoil, severely degrading the value of most employees’ 401k’s, and the politicians want to regulate 401k’s so that their retirement benefits become more predictable — that is, we’re going back to something like the 1950’s and 1960’s defined-benefit pension. Pay attention, however, to what’s happened to the salary portion of employee compensation over the last 50 years. Those 1950’s and 1960’s pensions were in addition to the employees’ salary, and now the “new” pension-equivalent, more predictable 401k’s will be funded by withdrawals from the paycheck, just like in the immediate past. Slick, huh? Employees have had their overall compensation reduced over the decades in such a way that only the oldest of old codgers are in a position to notice what’s going on. People who retired in, say, 1970, with a generous defined-benefits pension based on several decades of service, saw the value of the pension severely reduced by the 1970’s inflationary financial collapse. People retiring in the next few years, looking forward to living on their 401k’s, are now seeing their 401k values disappear in a deflationary financial crash. Sometimes I think there’s a lot to be said for John Derbyshire’s observation that modern society often looks like a conspiracy of the more intelligent against the less …
November 20th, 2008 at 7:29 am
401K’s are not unfair. You defer tax which means you pay whatever the income tax rate is when you retire and start withdrawling from the IRA. For example, if my tax rate is ?? now, I can have 6% of my income put away in 401K before taxes are taken out. This lowers my taxable income which is an incentive for me to save….that is a good thing. However, when I retire and start withdrawling from that 401K, I will have to pay whatever the tax rate is at the time of my retirement. The tax rate could be more or less than it is now so I’m taking that chance. What we hear little about is the Roth IRA. The Roth IRA is after-tax money that you contribute yourself up to $5000/year or more depending on your age. You can begin withdrawling tax free at age 59-1/2 because you have already paid tax on that money. Since we don’t know what the tax rate is going to be when we retire, it is wise to have half of your retirement in a 401K and half in a Roth. The Roth gives you a lot more flexibility and has other benefits to it that the 401K does not have. I like that I can control my Roth and determine where I want to invest it instead of being at the mercy of some investment firm like we are with our 401K’s.
November 23rd, 2008 at 6:09 pm
Welcome to the New World of wealth confiscation, part 1. Previous administrations gave us a glorious chance to take personal responsibility for our investments in the form of 401ks and IRAs and many did quite well.
Lately, events occurred that showed we need to do more than watch Cramer to protect our investments.
I guess we weren’t smart enough to hit the Money Market button on our 401k or IRA investment selector last spring but oh well. Since it is difficult to blame ourselves for our own investment ignorance, maybe we should trash our 401ks and IRAs and let Big Brother invest for us.
Now that’s a great idea. Big Brother will show us how investing should be done by replicating the ever favorite Social Security Ponzi scheme. I don’t know about anyone else, but having my investments in a parallel universe to the Social Security system will make me feel ever so comfy.