Friday, February 26, 2010

Your 401(k) - Obama’s Next Tarket

I knew that diligent, responsible savers would eventually be in the crosshairs of government officials desperate to “save” Social Security, but I never thought the attack would be so brazen.

Americans have a lot of money invested in defined-contribution savings plans such as 401ks, IRAs, and the like. A number of years ago, in the name of making the system "solvent", the politicians began talking about “means testing” to determine Social Security benefits. What this would amount to in plain English is that if you have substantial savings and/or other sources of income such as a defined-benefit pension that the government deems sufficient for your retirement needs, your SS benefits will be adjusted – i.e., cut – accordingly. The current benefits are calculated exclusively on taxes paid in, regardless of economic standing. Under “means-testing”, to put it another way, the responsibly frugal are to be sacrificed to the immediate-gratification wastrels who are rewarded with full benefits.

That idea has yet to go anywhere, but now there has emerged a much bigger threat. This latest Obama scheme really caught me by surprise for its brazenness, even though it is consistent with the Administration’s ideology. The plan is to “annuitize” the nation’s 401(k), and by implication all defined-contribution, individual retirement savings plans. As Newt Gingrich explains it:

“In plain English, the idea is for the government to take your retirement savings in return for a promise to pay you some monthly benefit in your retirement years.

“They will tell you that you are ‘investing’ your money in U.S. Treasury bonds. But they will use your money immediately to pay for their unprecedented trillion-dollar budget deficits, leaving nothing to back up their political promises, just as they have raided the Social Security trust funds.”

Yes, the politicians want to take your self-directed, self-financed savings, put it into government bonds, and in return pay you what they want to pay you when you retire (remember “means-testing”). Mr. Gingrich’s article is aptly entitled Class Warfare’s Next Target: 401(k) Savings.

In another op-ed, Paul Hsieh discusses the impetus behind the scheme:

“As the U.S. Social Security system moves ever closer to bankruptcy, the billions of dollars Americans have saved in their private retirement accounts will become an increasingly tempting target for our politicians.

“A government raid on private retirement funds wouldn’t necessarily take the form of outright confiscation.

“But regardless of the precise method employed, the basic principle would be the same: Your money would no longer be your money. Instead, the government would claim the right to redistribute your wealth to pay for others’ retirement on the grounds that they needed it more. In essence, the government would be implementing the Marxist principle: ‘From each according to his ability, to each according to his need.’ ”

Or: From each according to his level of personal responsibility, to each according to his lack of it.

As both writers point out, Obama’s plan is promoted as voluntary. And as both writers warn, don’t believe it. The Department of Labor and the Treasury have formally called for public comments on this pending scheme, which means they are moving forward with it. Tyler Durden exposes these little gems buried in the government’s official public release:

The Department of Labor and the Department of the Treasury (the "Agencies") are currently reviewing the rules under the Employee Retirement Income Security Act (ERISA) and the plan qualification rules under the Internal Revenue Code (Code) to determine whether, and, if so, how, the Agencies could or should enhance, by regulation or otherwise, the retirement security of participants in employer-sponsored retirement plans and in individual retirement arrangements (IRAs) by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement.

13. Should some form of lifetime income distribution option be required for defined contribution plans (in addition to money purchase pension plans)? If so, should that option be the default distribution option, and should it apply to the entire account balance? (Emphasis his)

“Could or should”, “regulation or otherwise”, “required”, “requirement”, “default option”? Those terms imply something entirely different from “voluntary” – and they are part of the language of the official statement!

As I pointed out above, don’t believe the political rhetoric. In classic Obama doublespeak, the plan is being trumpeted as voluntary, even as they lay the groundwork for mandatory participation (see ObamaCare).

Pay-as-you-go, government-guaranteed, government-run retirement plans, such as our own Social Security system, have been a monumental failure everywhere– a failure that is becoming ever more obvious. Now, rather than privatize and phase out the failed scheme, the politicians want to spread that failure across private savings – in the name of “social justice”. “When your in a hole, keep digging”, has never been good financial advice – but that’s your government’s plan.

If and when you lose control of your 401(k), it will be in the cause of bailing out the “needy” who were not responsible enough to plan for their own futures. That’s the classic moral rationalization. That’s not what you will be told. You will be told that the government is only trying to “enhance … the retirement security of participants … in individual retirement arrangements (IRAs)” because, by implication, you are not capable of managing your own affairs – or because someone else isn’t and thus needs your money. Another reason is our politician’s refusal to face reality, coupled with a healthy dose of power-lust. Either way, remember that the victims will be those of you who have planned, and thus already have the option and right to convert your retirement funds into private annuities. The “annuitization” scheme is solely for the benefit of those who don’t have the savings to purchase their own annuities. Those who do don’t need any government plan to “enhance” their “retirement security”.

I strongly urge you to read the referenced articles, especially the Gingrich and Hsieh pieces, as they are well worth reading in their entirety. This is a crucially important issue for all savers - and for America.

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