Monday, August 6, 2012

"Progressives" Have their Eye on Your 401k

For the last three years there have been rumors from the political right claiming that Obama and progressives are planning to take over people's IRA's and 401k's. The theory was essentially that given the huge deficits we currently have that the government would seize these assets ($2.9 Trillion in 401k's) in an exchange for a government IOU's and a low Treasury yield return. Though I had heard these rumors before, I had never heard a credible source to back the accusations. Until now.

To be fair, there is no direct connection I have found between the current administration and the progressives who are pushing for this, but President Obama has often looked to progressive think tanks for policies, including Health Care Reform, the 2009 stimulus and Cap-N-Trade to guide his own agenda. As you will see, this policy would seem to be in line with the President's governing philosophy so it would be no surprise that a second term might find "Retirement Reform" on the agenda. You'll notice that those who advocate for this "reform" use much of the same language as the President.

Teresa Ghilarducci a representative of Schwartz Center for Economic Policy Analysis describes the "Universal Pension System".  In here view the problems with 401k's are:

  • People choose to take money out
  • Management fees are high
  • Investors are not sophisticated
  • 401k system has “failed”
  • People can’t be trusted to make their own decisions
  • Pension reform must go beyond 401k
 She makes her presentation here:

And who is  Schwartz Center for Economic Policy Analysis? Its funded by Bernard L Schwarz:

Bernard L. Schwartz is an industrialist, a progressive public policy advocate and a philanthropist.

Back to Teresa, 

She seems to think that the primary problem is that people have choices but cannot be trusted to make good choices for themselves, thus, a mandatory system is required. I disagree with the premise. People can and do make choices, and although sometimes people make poor choices, it should be theirs to make. She also mentions that fees are high. In each 401k, fees are determined by the choices offered which are negotiated between the employer and provider. Some times the fees can be high. In most cases they are not. She specifically refers to Charles Schwab, Fidelity and Vanguard which are actually the lowest cost providers who often charge as little as 10 basis points, or 1/10th of one percent. So on that point she is either misinformed or  being dishonest. I would also point out that these same companies provide investment help and advice on 401 rollovers for no additional fee and offer no load mutual funds with low management fees. As a former Schwab investment adviser I know firsthand she is dead wrong.

She then refers to Retirement USA who she says are made up of pension advocates and worker representatives. Retirement USA advocates for "Universal Retirement" benefits. In their program, described in the video above, Teresa describes the new system to replace 401k's:

  • Mandatory 5% contributions.
  • $600 “gift” from government every year.
  • GSE would manage money.
  • Distributions paid over lifetime (no beneficiaries).
  • Returns indexed to inflation, would never lose money.
  • 3% guaranteed return plus inflation.
  • No tax deduction for contributions but instead a tax credit to everyone

I'll go through each of these issues one by one but first ask yourself, "How is this any different than our current social security program?" 

Ask yourself, "Why would they want to do this and who would benefit?"

Mandatory contributions are already made by both you and your employer right now into the social security program. Why do they advocate additional mandatory contributions? How is this different than a tax?

Any $600 "gift" from the government is not a gift but rather a form of tax policy. She specifically calls it a tax credit.

She describes a Government Sponsored Enterprise (GSE) to manage the money. GSE may sound familiar, as they are involved mortgages currently under the names Fannie Mae and Freddie Mac. You know, the two GSE's that required a $400 billion bail out when they were pushed by congress to make unsound loans in the name of increasing home ownership during the early 2000's.

Distributions would be paid over the lifetime of the person. Once again, how is this different than social security? In one very important way. You own your 401k. Because of this you can name beneficiaries and pass your savings onto your heirs. Under this program, you would not own your money and you would not be able to pass anything to your heirs. Any remaining money would go back into the government pot.

Returns would be guaranteed and adjusted for inflation. Currently your social security is supposedly guaranteed as well but the government uses dishonest CPI numbers to lower payments to current retirees. Of course, why not just by Treasury Inflation-Protected Securities (TIPS)? That's exactly what the government would do....until they start diverting money to other areas just as they have done to social security contributions.

Finally, there would be no more income deductions for contributions. Instead workers would merely get the $600 tax credit (AKA "gift"). This would result in higher taxes for everyone as those who deferred income would now have to pay taxes on their entire earned income.

Teresa makes no mention of 401k and IRA confiscations, but the new scheme would of course require money to get the program going just as the original social security program was funded with new contributions. She is indirectly talking about ending 401k programs because she says the government subsidizes the wealthy, denies $110 Billion per year to the US Treasury and because "76% of the benefit goes to the top 20% earners". So there you have it. That's what this is really all about. This program would be a $110 Billion tax increase and a redistribution of "retirement wealth".

I doubt this so called reform would have much backing but then again, the President's Health Care Reform has not, according to polls, been popular among the majority of Americans and was passed anyway.  If Obama is re-elected in November this may be on his second term agenda. Should that happen, people with substantial amounts in 401k's or IRA's may want to evaluate the risk of keeping their money in these types of accounts.

Some people might make comparisons between 401k confiscations and the gold confiscations of the 1930's. Keep in mind, they have to come get the gold from you if they want it or can even find it. Not so with your 401k or IRA. You could wake up one day, just as account holders at MF Global did, only to find that what you thought you owned is no longer yours.

Anticipating such a move is wealth preservation.


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