Bailing out Wall Street, not to mention paying for promised benefits to Social Security and Medicare recipients isn’t cheap. Neither is fighting two wars on the other side of the globe. Nor is national health insurance, one of the cornerstones of President-elect Barack Obama’s campaign.
How can the government pay for all these promises when deficits are at an all-time high, and in the midst of the worst economic downturn since the 1930s? One pool of capital is an increasingly tempting target to congressional do-gooders: your retirement plan.
Even after the massive downward moves in markets worldwide in the last few months, Americans have more than US$10 trillion in IRAs, 401Ks, and other types of private retirement plans. That’s a lot of dough. And, Congress is already working on a plan to tap those funds, in the guise of “protecting” your retirement plan from greedy capitalists.
Last month, the House Education and Labor Committee heard testimony from Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York. In the name of fairness, Ghilarducci wants to eliminate the preferential tax treatment of the popular retirement plans. Instead, she proposes that the government create "Guaranteed Retirement Accounts" for all workers.
Each year, the government would deposit US$600 (indexed for inflation) into your GRA. You would also be responsible for depositing 5% of your paycheck into it. The government would “guarantee” a 3% tax-deferred return on these assets.
If Ghilarducci gets her way, you could keep your current IRA, 401K, etc. However, the gains would no longer be tax-deferred. To give workers an incentive to convert existing retirement plans to GARs, she suggests letting workers trade in their retirement plan assets for GARs, with no tax liability.
If this plan becomes a reality—and it may, as it has influential backers in both major parties—do you actually think that Congress will be able to resist the temptation to tap GARs for its own purposes? That’s exactly what’s happened to the non-existent Social Security trust fund. In reality, there is no trust fund—only an obligation backed up by IOUs to pay off tens of millions of retirees in the years ahead.
Instead, GARs will become yet another piggy bank—ATM may be a better analogy—for Congress. Your retirement funds might be spent in reconstructing Iraq, bailing out U.S. car manufacturers, or on any other purpose that congressional solons find politically expedient.
Bad as it is, this proposal is not the end of private retirement accounts. Nor is there any suggestion that Congress emulate the example of Argentina, which last month nationalized US$30 billion worth of private pensions. However, in the next few months, you may need to make a choice: begin paying tax on the gains in your existing retirement plan, or convey the funds to the Feds for a promise of 3% annual tax-deferred gains.
I know what choice I’ll make—and it won’t be for another government “guarantee.”
Copyright © 2008 by Mark Nestmann
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