Unpacking The 401(k) Confiscation Rumor
Nov 12th, 2008 | By Dave Gonigam | Category: Financial NewsDR 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.
Source: Unpacking The 401(k) Confiscation Rumor
Advertisement
On March 30th, there'll be an announcement of FDA results for a new drug that could become the bestselling pill in the history of medicine.
One medical source says, "It could tap the largest pharmaceutical market ever." Even more exciting, early investors could make as much as $195,600, overnight... by getting in immediately.
Click here for the full details.
May God help us.
Thank you for tracking down the truth about this rumor.
Just so it is clear, we are not considering proposals to take away your 401(k), tax your 401(k) or force you into a government program. Plain and simple.
In fact, Chairman Miller is working to preserve and strengthen 401(k)s. He wants to ensure that 401(k)s adequately protect workers’ nest eggs by disclosing hidden fees that are eating into Americans’ retirement accounts. And, because older Americans stand to suffer the most from the economic downturn, Miller has called for the suspension of the unfair tax penalty for seniors who don’t take a minimum withdrawal from their depleted retirement accounts.
If you want to know more about what Chairman Miller is doing to make sure that American workers can enjoy a safe and secure retirement, go to our website: http://edlabor.house.gov/issues/strengthening401ks.shtml
Mike Kruger
House Education and Labor Committee
Thanks Mike
I am a retiree who worked hard and saved his whole life, played by the rules, served his country, raised a great family, and have wonderful grandchildren. Now that Mr. Waxman has completed the palace coup, the corrupt fix is in for the Franken takeover, and the senate will soon be veto proof, our country will enter the dark ages of a communist takeover of all wealth. It is with this cheerful belief that I am now beating the rush by getting my money out of all my IRAs and 401ks. I tend to be leading edge on my forecasts but always right so I (and my friends and relatives) will be one less group that the new regime will be able to bleed dry. Good luck trying to convince the markets to go up when all the smart money is stampeding out to safety.
The troubling question, though, is where IS safety nowadays? Gold? Commodities? Emerging markets? Nobody seems to have a concrete answer, but all seem to think that exploring options outside of the formerly "safe" retirement vehicles is a wise option.
>Just so it is clear, we are not considering proposals to take away your 401(k), tax your 401(k) or force you into a government program. Plain and simple.
Hmmm, I recall lots of other “plain and simple” promises from politicians:
* Woodrow Wilson’s 1916 re-election campaign slogan, “He Kept Us out of War” (with the implication that he would continue to do so)… within a year… well, oops!
* FDR promised (in the 1940 election) that he would “not send American boys into any foreign wars.” within a year… well, oops again!
* More recently, How about GHW Bush’s “plain and simple” promise “READ MY LIPS, NO NEW TAXES” — yet, well oops once again.
* Or GW Bush’s “plain and simple” statement that “I don’t think our troops ought to be used for what’s called nation-building,” — guess that was another “misstatement”.
So when a politician makes a “plain and simple” promise — really it means we can expect the EXACT OPPOSITE in fairly short order.
That’s pretty darn “Plain and Simple” and damn obvious to boot!
JKHutzman
PWCoIiAWSoFiaot
(Person WITHOUT Conflict of Interest in any way shape or form in any of this).
P.S. And as for the Government instantly “selling” the 401K assets — don’t be absurd — one of the key justifications for the “confiscation” will be to AVOID a massive downturn in the market, by “freezing” the 401K assets held as stocks, bonds, etc — that the government is doing everyone a BIG HUGE FAVOR by “taking control” of said assets (on everyone’s behalf and for THEIR benefit, etc) thus “stabilizing” the market.– and preventing panic sales that could cause such a depression.