In Argentina, politicians are planning to punish people who saved their money for retirement; President Kirchner plans to nationalize individuals retirement accounts:
Argentine President Cristina Kirchner announced this week that her government intends to nationalize the country’s private pension system. If Congress approves this property grab, $30 billion in individually held retirement accounts — think 401(k)s — managed by private pension funds will become government property.
That the state could seize retirement savings no doubt seems outrageous to Americans. But it is a predictable development in a country where government intervention in the financial system is the norm. With Washington now expanding its role as guarantor in American banking, that’s something to think about.
Could it happen here? Yes, actually. The House Democrats are thinking about ending 401(k) accounts (H/T):
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.
First, we already have the social security tax of 12.4% (6.2% from the worker, another 6.2% from the employer). Second, instead of being able to invest in mutual funds that, over decades, average 8-10% annual interest, we get 3% government bonds.
Let’s do some math for a not-so-hypothetical worker named Hubbard, age 27, who saves a large chunk of his salary because he’s a touch neurotic. For 2008, he saves approximately $10,000 and receives a partial match from his employer of $2,000 for a total savings of $12,000. If he plans to retire in 2045 at age 65, and his interest compounds at 7% (a low ball long run figure), then according to this calculator, from that one year of saving and investing alone he’ll have $156,951. Now let’s say he does as the government could mandate, saving 5% of his salary, which would be $2,370, plus gets $600 from the government, for a total savings of $2,970. Invest that for the same amount of time in government bonds earning only 3%, and at age 65 he’ll have $9,132. That’s a difference of $147,819.
NOW COMPOUND THAT DIFFERENCE OVER DECADES OF INVESTING. That’s a lot of lost money.
It won’t do to say that our hypothetical worker should invest the difference in another account. Ed Morrissey explains:
The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.
That means your employer can no longer write off their contributions to your 401(k), and your capital gains would be taxable year-on-year. In other words, it becomes just another investment or savings account, with no tax benefit at all, and no employer contribution. Instead, Uncle Sam would give you your “matching” funds — up to a whopping $600 per year! Whoopee!
As Michelle Obama says, you could buy a pair of earrings every year … except, of course, you can’t. It’s in The Lockbox, defined by politicians as Locked Away from You but Accessible to Us. It goes there along with 5% of your gross earnings, apparently to play with the 7% of your gross earnings that already goes to Social Security. And what do they do with the money? They give you government bonds as your only investment option.
Maybe you’ll be lucky, and they’ll have Franklin Raines running the agency issuing those bonds.
Let’s pray this bad idea goes nowhere.
Posted by Hubbard in It's Economics - Stupid!, The Democratic Congress