Consider yourself warned
Maybe you saw the headline the other day about how market losses have vaporized $2 trillion from Americans' 401(k) and pension plans.
What you probably didn't see was this: A proposal to vaporize the tax advantages of 401(k)s.
Well, "proposal" is probably giving this more credit than it deserves. It emerged during the same Congressional hearing where that $2 trillion figure was revealed. The chairman of the committee holding the hearing appears to have suggested this off the top of his head. And as the journalist Linda Ellerbee once quipped, ideas off the top of one's head are like dandruff — small and flaky.
But please, don't take my word for it. Here's the account from the hearing room:
A wide range of sweeping changes to the 401(k) system were proposed Tuesday at a hearing on how the market crisis has devastated retirement savings plans.
Chief among them was eliminating $80 billion in tax savings for higher-income people enrolled in 401(k) retirement savings plans.
This was suggested by the chairman of the House Committee on Education and Labor.
“With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said.
“We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings.
Let's be absolutely clear about what's going on here: Under the guise of "protecting" people's retirement savings from market losses, a veteran Congressmember is suggesting that you [unless you fall outside his definition of "higher-income," heh-heh] should no longer be allowed to make tax-deferred 401(k) contributions. Because to the mind of a Congressmember, the tax money you defer doesn't really belong to you. It belongs to the government to spend on its wars for the military-industrial complex and its bailouts for the financial-insurance-real estate complex.
Of course, this raises all manner of unanswered questions. Does this apply only to future 401(k) contributions? Or will existing holders of 401(k) accounts be required to fork over taxes based on the current value of the account? Will that be in one lump sum, or spread out across a number of years? Will this apply to IRAs as well as 401(k)s? And what about folks in the Roth IRAs and 401(k)s who made their contributions after-tax? Will they have to pay a second time when they withdraw?
But that's the great thing about speaking off the top of one's head. You don't have to provide details.
Oh, and what, pray tell, might replace the present system? Here, we do have a bit of an answer. We return to the hearing room:
Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York.
When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan.
“The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks,” which goes to the highest-income earners, Ms. Ghilarducci said.
That simply results in transferring money from taxed savings accounts to untaxed accounts, she said.
“If we implement automatic [individual retirement accounts] or if we expand the 401(k) system, all we’re doing is adding to this inefficiency,” Ms. Ghilarducci said.
I wish I'd blogged about this so I could trot out the proverbial I-told-you-so, but alas it's something I've shared only in inter-office correspondence. So you'll just have to take my word for it: I figured the day might come when someone would start floating proposals forcing people to dump a portion of their retirement savings into T-bills or savings bonds. Granted, that's not quite what the professor is talking about here with her "trade-in" proposal. But make no mistake, we've started our way down the slippery slope.
Consider yourself warned. What might be an idea off the top of a Congressmember's head now could easily become legislation next year.
[Hat tip Prof. Michael Rozeff at the LRC blog]