Yes, that’s correct. The Democratic Party, which constantly claims to be the party of the working and middle classes, wants to abolish 401k plans and force you instead to contribute to a mandatory government run retirement plan which will pay a paltry 3% a year adjusted for inflation.
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.
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 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.
“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.”
Without the tax deduction there’s not much point in having a 401k plan unless there’s a good employer match for the contributions that the employee makes, so the majority of these plans will just cease to exist. This is all just another good example of why we can’t elect Democrats. They believe the government should run every aspect of your life.
Update:
Now James Pethokoukis is taking up this issue, and stating that the Democrats plan to develop a mandatory nationalized savings plan is just more socialism.
I hate to use the “S” word, but the American government would never do something as, well, socialist as seize private pension funds, right? This is exactly what cash-strapped Argentina just did in the name of protecting workers’ retirement accounts (Efharisto, Fausta’s Blog). Now, even Uncle Sam isn’t that stupid, but some Democrats might try something almost as loopy: kill 401(k) plans.
House Democrats recently invited Teresa Ghilarducci, a professor at the New School of Social Research, to testify before a subcommittee on her idea to eliminate the preferential tax treatment of the popular retirement plans. In place of 401(k) plans, she would have workers transfer their dough into government-created “guaranteed retirement accounts” for every worker. The government would deposit $600 (inflation indexed) every year into the GRAs. Each worker would also have to save 5 percent of pay into the accounts, to which the government would pay a measly 3 percent return. Rep. Jim McDermott, a Democrat from Washington and chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, said that since “the savings rate isn’t going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that’s not generating what we now say it should.”
A few respectful observations:
1) McDermott is right when he says the savings rate isn’t going up. But the savings rate doesn’t include gains to money you invest in the stock market. It ignores the buildup of net worth. (If you bought a share of XYZ Corp. in January at $100, for instance, and its value doubled by December, the savings rate measure would still value that investment at $100. In short, the savings rate is a phony number.)
2) So based partly on the above faulty logic, the $4.5 trillion, as of the start of the year, invested in 401(k) plans doesn’t count as savings.
3) Ghilarducci would have workers abandon the stock market right at the bottom of the market. A stupid idea, according to Warren Buffett: “I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: ‘Put your mouth where your money was.’ Today my money and my mouth both say equities.”
4) Ghilarducci 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.
5) What effect would this plan have on an already battered stock market? Well, I would imagine it would send it even lower, sticking a shiv into the portfolios of everyone who didn’t jump aboard. But I am sure the Chinese would love to jump in and buy all our cheap stocks to fund the retirement of their citizens.
Not only is it socialism, but it would have an absolutely devastating effect on the economy and the stock market. If you think the markets are bad now, wait until something like this Democratic plan to abolish 401k plans hits the fan. You ain’t seen nothing yet. Of course, you can help stop this kind of thing from happening by not voting for Democrats. You’d be doing your country a gigantic favor.
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Just another republican lie. This was at a hearing where Teresa Ghilarducci a professor of economics outlined her vision. This is not a democratic policy or position. To suggest this is the demise of 401K’s is plain stupid and typical fear mongering by the right. In this economic crisis shouldn’t everything be expolred that has the remotes possibility of helping. If the consenses is that it is a bad idea it will die it’s norman death. If it is a good idea then it will survive for further discussion.
I am sick to death of the Limbaugh’s of this world with their out right lies and it appears the public is as well. All the negative campaigning by McCain see him fall further behind. Thank you America your eyes and ears are open and you are seeing and listening like you have never before.
Posted on October 24th, 2008 at 11:33 am
There’s really no question that this is a real Democratic proposal, and it has nothing to do with Rush Limbaugh. It was being discussed by Democratic strategists on Neil Cavuto’s show yesterday which I was watching. It is a real story, but keep lying about how it’s not. Maybe somebody will be dumb enough to believe you.
It’s also not hard to believe that the Democrats would want to do this, because the Democrats are all about having the government run your life because they think we’re too stupid to take care of ourselves. If we’re unfortunate enough to have a president Obama with a Democratic congress I have little doubt that this proposal will advance. You mention that we need to consider options to help our economic crisis, but killing the tax deduction on 401ks will only make things worse by driving the stock market down and forcing people to invest their money at a ridiculously low 3% a year.
Posted on October 26th, 2008 at 4:49 am
I like this line, “It’s also not hard to believe that the Democrats would want to do this, because the Democrats are all about having the government run your life because they think we’re too stupid to take care of ourselves.” Except that those who are smart enough to take care of themselves are the first to run to the government for help when s**t hits the fan. Who were the first to rush for a government handout when the credit crisis hit? - bankers and the wealthy investor class - hardly staunch Democratic supporters. Why do you think these alternative ideas are proposed? Because people whose 401K’s got hit hard by the actions of the reckless non-stupid complained to the government and asked for less risky alternatives.
Posted on November 2nd, 2008 at 2:02 am
If you want a less risky alternative than the stock market, you can invest your 401k as conservatively as you like. You’ll still end up with more money than you would under the forced savings plan that the Democrats have come up with. You can also contribute more to a 401k than the 5% the Democrats would force you to save, or contribute less than 5% to a 401k. You can even stop contributing to the 401k altogether if you want.
None of those are options under the Democrats mandatory plan. The Dems plan also will pay out a ridiculous 3% return. Even a conservative portfolio of mostly bonds with something like 25% stocks would do far better than that. No matter how you look at it the Democrats proposal stinks on ice. It’s absolutely horrible. Nobody would be better off under that plan. But, like I said, it’s all about the Democrats gaining as much control over your life as possible. That’s why they want nationalized health care, that’s why they’re opposed to school choice so you’re locked into the failing public schools system etc.
Posted on November 2nd, 2008 at 4:02 am
Putting my 2 cents worth in here on the credit crisis and the banking industry… Aren’t all the banks and financial institutions that failed headquartered out east where the majority of the liberals reside? Now wouldn’t it stand to reason that they had a hand in the crash. The whole reason for this problem is we are a society of entitlement. We can have and do what ever we please with no consequences. The lenders went down a path of greed and decadence they should suffer. 401k money has taken a hit but if people stop panicing and realize it is on paper they took the loss they will be just fine. My advice screw the banks and the banking industry. Learn how money works. Take what is left of your bleeding 401K put it in a self directed IRA invest in offshore instruments and learn to take care of your self or the government will do it for you and it ain’t pretty.
Posted on November 2nd, 2008 at 5:42 am
The question is …… if/when the dems get their paws on our 401ks is there something we can do ahead of time to keep them from it. I will be 57 soon and cannot get to mine, without penalty till 591/2……. and already retired. I am not contributing in the way of salary but up until now the dividends have been helpful for growth. Would rolling to an IRA prevent the gov’t from getting to it? Anyone know. I am happy letting my company pick up most of the fees associated with the 401k, which is why I haven’t rolled it to a broker……. who wants to pay theim.
Posted on November 8th, 2008 at 6:58 am
Betty,
I would strongly suggest rolling your 401k into a rollover IRA. I would also very much consider converting that IRA into a Roth IRA. The IRA rollover is a no brainer. I just did it myself to get my money out from the 401k I had at my previous practice, and I did it when this whole 401k story broke.
Posted on November 8th, 2008 at 1:29 pm
Gubbs said, in part:
bankers and the wealthy investor class - hardly staunch Democratic supporters
Are you KIDDING me???!!
Where the hell have you been lately?
The Democrats and Republicans alike have received MASSIVE contributions from big oil, big labor, big banks, and BIG About Everything else for decades on end?
Question to Eye Doc, however:
What are the REAL chances of something like this going through?
It does appear so far this is just testimony from one person on this committee type meeting.
Posted on November 12th, 2008 at 8:14 am
Eye Doc,
I agree about rolling over to an IRA–but a Roth? Why?
Based on current information, isn’t the whole point to have tax deferral and that this is generally seen as a more efficient way to save (long term), when presumably under the current tax arrangements for (presumably, seniors, for most retirees), you’ll have a better advantage later in life?
You spend any money, you might still get nailed for taxes later in life, but at least you’ll have more “front end loading” of money up front if its not taxed at the time you save.
Posted on November 12th, 2008 at 8:19 am
Yes, I understand your point. However, I expect income taxes to be dramatically higher in the coming years than they are now because of the massive unfunded liabilities in the Social Security and Medicare systems. Because of this, it may be prudent to convert to a Roth while you still can, because I strongly suspect the government will stop allowing Roth conversions sometime in the future. And, I think it makes sense to pay the taxes now at a lower rate, than to wind up paying 70% income taxes on your IRA 10 years down the road.
Posted on November 13th, 2008 at 4:59 am
Roger that, doc. Thanks.
Yeah–it makes sense that at some point there’ll be a money grab to pay for all the crap being doled out even now.
Posted on November 13th, 2008 at 6:03 am
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