The Welfare Queens want my Retirement Account Too

OK, I am going to do my best to not sound like a raving lunatic conspiracy theorist. But it is going to be hard to do given this subject matter. Congressional Democrats are exploring the option of ending the 401(k) plans we currently have and replacing them with MANDATORY Guaranteed Retirement Accounts. This isn’t a done deal, but it IS being floated in a Congressional Committee. You might not want to read the rest of this post…

I am not panicking yet, but that this is even being considered is downright socialist. I hate talking about rumors and getting people riled up about things that are nonsense, but this is not just a rumor. So let’s start with the basics. A Congressional Committee headed by George Miller (Dem, California) and Jim McDermott (Dem, Washington) has decided to look into “reconstructing” America’s pension plans. In other words, the 3 Trillion dollars currently in the 401(k) plans we all have worked on is what they are looking at. Their reasoning? The current system has failed at encouraging Americans to save for retirement. Additionally, the plan is, in their opinion, unfair because wealthy Americans who payer higher income tax get a better tax deferment on their 401(k).

Let’s explain that shall we. 401(k) contributions are tax deferred. You don’t pay money on what you put into them. They are pre-tax dollars on your income. So if your are in the 39% income tax bracket (meaning you pay 39% of your wages to income tax), then taking money out pre-tax for putting into your 401(k) means you are getting a 39% tax deferment on your money. But if you are only paying 20% income tax rate, you are only getting a 20% deferment for your 401(k). These Congressmen don’t think this is fair. They would like everyone to get equal break on taxes regardless of what income tax bracket you fall under. So they would like you to pay higher income taxes, but get the same tax break on retirement saving as someone who pays zero percent (and before you write off that 0% part, remember that 40 million Americans fall into that category).

So I begin with a great deal of angst about why they are even looking at changing the system. The premise for change is to hit those paying higher taxes harder on retirement savings than those who pay less taxes. Already this sounds a bit socialist to me. 

So they are holding these hearings. One of those testifying and offering a solution is Teresa Ghilarducci, an economics professor from The New School of Social Research in New York. Teresa offers her plan: Eliminate the current 401(k) system. Under her plan Americans will contribute 5% of their income to a guaranteed retirement account, this is mandatory not voluntary. This 5% will NOT be tax deferred. You will pay income on the mandatory 5% you invest in your retirement up front. In return the government will give every American, regardless of income or amount invested, a $600 per year tax credit when filing income taxes at the end of the year. You will still be required to pay social security and medicare taxes.

At the end of your working career, when you retire, the government will guarantee you a 3% plus inflation return on your investment. Your money in the mean time will be invested by government investors (because in her words we are not smart enough to make our own investment decisions, she really said that). This program will be managed by….are you ready…the Social Security Administration. The same group that has so aptly managed our social security system that is going bankrupt.

A couple of other small caveats to the plan: employers will no longer be allowed to write off contributions matching your contributions (which means employers will stop matching us altogether in my opinion). Under your current 401(k) and IRA accounts, if you die, your heirs get 100% of your account money. Under the Guaranteed Retirement Accounts, heirs would receive only 50% of the money that you saved. They would not receive the employer contributions or the government earned interest.

In an interview that is at the link I will provide below, she actually stated that her plan is spreading the wealth. She actually said that! And what were our Congressional members reactions to the plan? They said her plan was “intriguing” and will be “part of the discussion”. Let’s not forget that our new President Elect stated in a 2001 interview, “The Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in society.” The Constitution says only what “the states can’t do to you. Says what the Federal government can’t do to you.”

So yes I am worried a bit about this. For those who think I may be making this all up or skewing the facts I give you these links: First from the Wall Street Journal

Targeting Your 401(k) – WSJ.com

And then from US News and World Report (and as a note, go about half way down the page on the right hand side and there is a video, listen to it, it is an interview with her explaining her plan and making the statement that this is sharing the wealth): Would Obama, Dems Kill 401(k) Plans? – Capital Commerce (usnews.com)

And finally a blog:Lofty Matters » Guaranteed Retirement Account

So let’s hear your thoughts on this grand socialist scheme.

UPDATE…As you can see in the comments below, thedoyle has already written on this subject some time back (putting me in awe of his incredible foresight!). I went and checked out the link and found it to be enlightening and containing some aspects that I hadn’t covered. You should definitely go and check it out at this link (after you post some comments here first though!):

http://individualegoist.wordpress.com/2008/11/07/socialism-on-the-menu-obamas-favorite-dish/