They say that desperate times call for desperate measures. Well, of late, the markets have surely seemed desperate—and goodness knows, the response by regulators and lawmakers, certainly to this point, reeks of desperation, IMHO. We do seem, for the moment anyway, to be in something of a “pit” (and one, I must say, that the politicians seem to be trying to fill with money).
As if things weren’t complicated enough, we’re also in the waning weeks of what is perhaps the longest election cycle in history—one that, according to the pundits, will sweep the Democrats into a fuller, if not veto-proof, majority in Congress, if not the White House itself. If those trends hold, the pendulum would have continued its swing back—from the 2000 elections where the Republicans controlled all three, the 2004 elections where they solidified that hold, and the 2006 interim elections where Democrats regained their control of Congress. Such is the way of American politics.
Still, having spent some part of the last several years worrying about the establishment of a “you’re on your own-ership” society (see IMHO: Legs to Stand On , IMHO: Dead "Beat" ), I have been distressed to see a growing voice given to those who would treat the ills of the employer-based leg of the three-legged stool - by amputation.
Those voices garnered some unwanted attention this month when the House Education and Labor Committee conducted a round of hearings on “The Impact of the Financial Crisis on Workers’ Retirement Security.” Unwanted attention in the form of headlines that read “House Democrats Contemplate Abolishing 401(k) Tax Breaks,” “Would Obama, Dems Kill 401(k) Plans?”, “Eyeing Your Pension: Are 401(k)s safe from congressional Democrats?”, and blog headlines that were even more provocative (“A 'Spread the Wealth' Plan for your 401k?”). Why, the word got out so fast that Congressman George Miller (D-California), who chaired the hearings in question, felt the need to reassure the media of his good intentions regarding the programs by issuing a background memo ahead of another hearing on Friday with the subject line “Background Memo on Preserving and Strengthening 401(k)s.”
What stirred things up was the testimony of Dr. Teresa Ghilarducci, who reiterated her previous advocacy for a “Guaranteed Retirement Account” (funded by a 5% of pay tax on workers and employers and a $600/worker contribution from the federal government) in place of the current tax preferences accorded 401(k)-type plans. And, apparently in keeping with lawmakers’ current inclination to bailout various troubled constituencies, she also suggested allowing workers to “trade their 401(k) and 401(k)-type plan assets” for one of those Guaranteed Accounts—at mid-August prices, no less.
Of course, it’s one thing to make a proposal (Ghilarducci has gone so far as to write a book around hers; see IMHO: Conspiracy Theories ), or even to entertain the notion as part of a broader inquiry into considering ways to shore up the existing system. What got things stirred up were the intimations that Miller and Congressman Jim McDermott (D-Washington), chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, were actively considering the approach (1).
It doesn’t take much imagination to see where this kind of approach would take us. IMHO, it’s, at best, just a sneaky way to raise the Social Security tax from 12.7% of wages to 17.7% (and that’s not even counting the cost of the $600/worker the federal government would toss in). And that for an account that you couldn’t tap in a financial emergency, or leave to a spouse or children—because, despite the nomenclature, it wouldn’t be an “account” at all. On the other hand, you’d no longer have to worry about that saving for retirement plan—you’d just have to worry what new plans politicians might develop for your retirement “savings” (in her book, Gilharducci says that the financial risks are “borne by the government, not by the worker”—as though the government has a funding system independent of those workers).
Now, as I said before, these are difficult, extraordinary, even unprecedented times—and we find ourselves dealing with them smack dab in the middle of an election year. It is a time that cries out for bold action—and yet it is a time when even those with the best of intentions can do great harm.
The pendulum does, after all, swing back and forth. But if, god forbid, those pendulum swings wipe out the 401(k)—well, IMHO, that would really be the pits.
— Nevin E. Adams, JD
(1)Fueling concerns was the announcement that Argentina's leftist President Cristina Kirchner had signed a proposal nationalizing the country's private pension funds. The move, which is being challenged in the courts there, would transfer all the assets in individual accounts to the nation’s "pay as you go" system, even as it made future contributions to the state system mandatory. See “Argentina President Moves to Nationalize Pensions”
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