Saturday, October 25, 2008

Kiss Your 401(k) Bye-Bye? P-I-G Delight!

P-Mac doesn't like what he hears from the DC Establishment Lefties.

...Reps. George Miller of California and Jim McDermott of Washington, both Democrats, head a couple of committees that make law about retirement accounts. They've been listening to critics of 401(k) plans, including an economics professor who's got a notion to force people into a government-run replacement.

...The plan that Miller and McDermott liked, by economist Teresa Ghilarducci, has been peddled for at least a year by the influential left-leaning Economic Policy Institute. It would repeal the law by which you don't pay taxes on money you put into your 401(k) or earn in it. The accounts would be taxed as any investment. [Note well: the Economic Policy Institute is Union-funded.]

Meanwhile, all workers whose employers don't offer a sufficiently generous pension would be required to divert 5% of their pay into an account handled by the Social Security Administration. It would be invested in government bonds and would supposedly provide a return of 3%, no more, no less.

Let's break for perspective.

There are three common forms of retirement benefits for most folks; this will be a VERY brief and not-too-technical overview. There is nuance in each of these, and there are a number of twists and turns which may be applicable only to your workplace and your personal situation. I ain't not a Retirement Specialist, CLU, or other kinda guru, folks. Do NOT take this to the bank.

1) Fixed-Benefit Plans require the employer to pay retired workers $XXX/month, the number being decided by some formula usually including years of service and average pay in the last few years of employment. This is the plan commonly held by powerful unions (UAW, Machinists, Steelworkers, Teamsters, AFSCME, Trades) and (surprise!!!) by public salaried employees such as Milwaukee County Supervisors, Congresscritters, Governors, and Leggies. They are generally the most-expensive plans; that is, they cost the employer a lot of money because if the plan's assets do not bring in the expected return, the employer must contribute extra money to make up the difference.

Ask Scott Walker about these plans...

2) Fixed-Contribution Plans require the employer to deposit a percentage of your annual pay to a retirement fund (say 5%.) After you retire, you withdraw from the accumulated assets in the fund. Generally, an actuary figures out how much you get every month based on your life-expectancy and that's the amount you get. If the assets diminish or increase significantly, the withdrawals are re-figured. Some Wisconsin public employees have this sort of plan. Note that the employer's pension contributions stop when you stop working, making it a less-burdensome plan to your employer.

3) 401(k) Plans are similar to Fixed-Contribution plans--your employer usually (not always) "matches" a certain portion of what YOU contribute. The assets are invested, usually at the discretion of the employee, and at retirement, withdrawals are made as in Fixed-Contribution plans, except the Government has rules about how much you must take every year. Again, the employer's obligation stops when you stop working.

Generally speaking, employers which provide 401(k) plans are in highly-competitive industries and may be thinly-capitalized--that is, their stock is not publicly traded. There's not a lot of fat to spread around.

Why do this, when nearly any prudent 401(k) can double that return long-term with a middling mutual fund? Because 401(k)s are unfair, Ghilarducci says - lots of people don't save into them, so the break goes to a "lucky few."

P-Mac goes back to the infamous Joe the Plumber exchange with the O-and-Savior. Pay attention to the red-highlighted word:

The Ohio man asked Obama a good question: Where do you get off jacking up taxes on me when I strike it rich via hard work and enterprise? Obama's rambling, unguarded answer was telling. He said that plumbers do better when "folks from the bottom up" have money to get their plumbing fixed. Obama concluded, "I think when you spread the wealth around, it's good for everybody."

"Wealth" is different from "Earnings." To economists, "wealth" is assets--what you own--like your house, your cars, your Elvis recordings and collector Smurf dolls, diamonds, stocks, bonds, and cash-in-the-bank. "Earnings" is exactly that: what you get paid in salary, wage, and/or dividends and interest. Taxing "earnings" is commonplace.

On the other hand, the only "wealth" tax we have is the estate tax, and while that is a burden to some people who have accumulated wealth, like farmers who own several thousand acres or plumbers who built a successful business, it doesn't usually hit a lot of middle-class-salary-man/wage-man type folks.

If we take Obama's "wealth" comment seriously, it is extremely significant.

Taxing a 401(k) under the terms vaguely outlined by Ghilarducci would be a new 'wealth' tax--you'd pay cap-gains taxes when the gains were taken, not post-retirement when rates are lower. More significant, employers would NOT have a tax-incentive to contribute to your 401(k) retirement any more. Worst of all, you would be required to finance the Government's debt at 3%--a helluva deal for Congressional spenders, but not necessarily for you.

In brief, it's the death-warrant for the 401(k) plan.

Thus, the Ghilarducci plan has two very powerful built-in constituencies:

1) The Party-In-Government (PIGs), who will be able to spend a bunch of money (and purchase a lot of votes) at VERY low interest-cost; and

2) Unions, who have extracted a "sufficiently generous" retirement plan such as fixed-benefit or fixed-contribution. In other words, it will benefit the AFL-CIO, AFSCME, Teamsters, Machinists, Steelworkers, and UAW. Fuggedabout thinly-capitalized or highly-competitive businesses. Work for them and you're screwed.

This plan will hit anyone with a 401(k), which includes a lot of people who drive 10-year-old Fords and whose 'exorbitant nights-out' consist of once-a-month movies w/a fish-fry and a late chocolate malt from Gilles', (which is most of the 4.5 readers of this blog.) In other words, regular people who are not likely paying Union Bosses or taking a Government pension.

And it will force them to accept a VERY meager dole from the Government--3%, forever--meaning that Government spending will go up to purchase more votes.

Reduced to its simplest terms, the attack on the 401(k) will benefit only two interest-groups: the Party-In-Government and the Unions. If you don't work in a union shop or for the Government, go to the back of the bus.

The PIGS and their Union Co-conspirators. What a great group of folks. "Spreading the wealth," indeed.


Al said...

Because 401Ks & 403Bs end up paying out better than Social Security, even in bad times, they are proof that SS is a failure & that calls to privatize it are justified.

So if you are a big government, Pro-Union Dem, what do you do? Rather than do the right thing, you destroy the 1 thing that works & keeps you from being beholding to big government socialism.

Headless Blogger said...

Excellent post. One quibble.

"And it will force them to accept a VERY meager dole from the Government--3% ..."

That can also be interpreted as "will force your children and grandchildren to pay for your retirement as these 3% bonds come due."

This Obama plan creates another Federal Ponzi scheme. Rather than fix the problem, as AL suggests, this one goes all-in on the same 1930's FDR Socialist idea that is failing today.

I will take about 100 years for Social Security to finally meet it's demise. The short-sighted mathematically-challenged Democrats seem intent on created a program that will end the American way of life. Another part of a long-term plan from 1960's radical-Marxists/current-day university educators that is finally bubbling up to the mainstream.

Anonymous said...

Hmmm - a plumber would have to have one heck of a good business to qualify for estate tax. Joe the Plumber hasn't got a prayer, so don't be worrying about his "estate".