A Closer Look At the Democrats Seizing Your 401(k) [Truth Via Numbers]

11/08/2008 02:35:00 PM

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If you didn't know it, the House Democrats think they are looking out for your best interests regarding your recent 401(k) losses, in a discussion to confiscate them, and then nationalize them.  An example of how this would effect our personal 401(k) is at the end of the post under RANT ON.  Basically right now, we get a 64% return GUARANTEED on our initial investment.  Under the Dem's plan to nationalize our retirement, our return would only be 1%.  So who is exactly who looking out for our best interests?

The House Democrats are discussing taking 401(k)s back to the value they were in August, 2008 before the stock market declined and restoring the 401(k) back to its full value.  Then they are discussing seizing those funds and putting it into a Social Security fund that will grow by 3% each year with government bonds, which will be adjusted for inflation.  The most one would be able to contribute to it each year would be 5%.  A company match will no longer happen.

A plan by a professor of economic-policy, Teresa Ghilarducci, states that, 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% a year, adjusted for inflation. [Ghilarducci's Testamony to the House [PDF] on October 07, 2008]

"I want to stop the federal subsidy of 401(k)s," Ghilarducci said in an interview.  "401(k)s can continue to exist, but they won't have the benefit of the subsidy of the tax break."  "I want to spend our nation's dollar for retirement security better.  Everybody would now be covered" if the plan were adopted.

John Belluardo, president of Stewardship Financial Services Inc. in Tarrytown, NY has said, "From where I sit that's just crazy."  "A lot of people contribute to their 401(k)s because of the match of the employer," he said.  "If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets," said Belluardo.

Ed Ferrigno, vice president of the Washington office of The Profit Sharing/401(k) Council of America has said, "Some of the tenor [of the hearings last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system."

James Pethokoukis writing for the US News described the plan:

In place of 401(k) plans, she [Ghilarducci] would have workers transfer their dough into the government-created "guaranteed retirement accounts" for every worker.  The government would deposit $600 (inflation indexed) every year into the GRAs.  Each worker would also have to save 5% of pay into the accounts, to which the government would pay a measly 3% return.  Rep. Jim McDermott, a Democrat from Washington and chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, said that since "the savings rate isn't going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should."

The Carolina Journal and LGF reported:

Democrats in the U.S. House have been conducting hearings on proposals to confiscate workers' personal retirement accounts - including 401(k)s and IRAs - and convert them to accounts manged by the Social Security Administration.

Triggered by the financial crisis the past two months, the hearings reportedly were meant to stem losses incurred by many workers and retirees whose 401)k) and IRA balances have been shrinking rapidly.

The testimony of Teresa Ghilarducci, professor of economic policy analysis at the New School of Social Research in New York, in hearings Oct. 7 drew the most attention and criticism.  Testifying for the House Committee on Education and Labor, Ghilarducci proposed that the government eliminate tax breaks for 401(k) and similar retirement accounts, such as IRAs, and confiscate workers' retirement plan accounts and convert them to universal Guaranteed Retirement Accounts (GRAs) managed by the Social Security Administration.

This type of plan didn't work so well in Argentina.  In Argentina, private pensions are somewhat like 401(k) accounts in the United States.  Argentine lawmakers are considering a plan to nationalize about $26 billion in private pension funds.

Argentina announced last month on October 21, in what has been called a "surprise bill",  that it was taking over the pension system to protect workers from losses, thus nationalizing the pension system in a way to raise funds to avoid its second default in a decade.  Currently Argentina has about $150 billion in debt.

After the release of this announcement, the Merval index (the Argentina version of the NYSE) fell more than 10% the same day and the next day, and by Friday had dropped 28%.  The damage was worse in the local debt markets, where trading volume for a a key local bond market was practically zero the next day, Wednesday, compared to a normal day's turnover of about $1 billion.

A few days later, a U.S. judge ordered the freezing of more than $553 million in U.S. investments held by the Argentine pension funds that the government intends to nationalize.  The judge ordered the blocking of property in the US "including but not limited to cash, deposits, real property, instruments, securities, security entitlements, security accounts, equity interests, claims, and contractual rights and interest" maintained in the name of the Argentine pension funds. 

However, another judge has blocked Argentina from transferring any of the pension fund investment out of the US until he hears the complaints of bondholders.  Argentine officials saw this as "an attempt by vulture funds to take possession of these assets without considering whether it belongs to them."

It was announced just today, that the pension nationalization bill has passed in the Argentinian Lower House.  The Senate will vote on the bill later this month.


So lets talk about me/us for a minute.  We, meaning us.. you know what I mean, place 4% of our income into a 401(k) account which is matched by the company my other half works for.  (Yes I have my own, however its rather small, and basically is the same program that my other half has.)  This was placed into a 4.8% fixed interest account back in September before all this hoopla.  Before that, there was a hit of about 9% since the beginning of the year, which is acceptable considering many lost 40% or more.  That is the chance one takes when they invest and unfortunately, this can not be taken as a loss.  But moving forward, any money that is placed into this account is not taxed. 

In comparison to the Dem's idea, an additional 1% would be taken out of income, and additionally the entire 5% would be taxed and placed into a 3% fixed interest account, giving $600 bucks a year in addition.  Also by doing this, this means that if a loan is needed, it can not be done as the government has the money, and can use it as it sees fit via the Social Security Surplus Bill.

So lets look at the first year numbers under this new plan, with an income of say $50K, shall we?

Income:  $50,000.00
401(k) at 4%:  $2000.00
Tax Liability:  $48,000
401(k) Match:  50%
Total 401(k) investment:  $3000.00
Total Return at 4.8% fixed:  $144
Total: $3144.00 which is a 64% return on the initial $2,000 investment.
No tax liability on the original $2000.00
Income: $50,000
401(k) at 5%:  $2500.00
Tax Liability: $50,000
401(k) Match: 0%
Total 401(k) investment:  $2500.00
Total return at 3% fixed:  $75.00
Total: $2575.00 which is a 3% return on the initial $2,500 investment.
Tax Liability on the original $2,500.00 @ 20% = $500

Total Profit?  $1,114.00
Return:  64%

And, if needed, one can take out a loan, under certain terms.
Total Profit? 

1.  3% on $2,500 = + $75.00
2.  20% Tax on $2,500 = -$500.00
3.  $600 "Match" = +$600.00

Total Profit?  $25.00
Return:  1%

Nothing has been stated about loans, but do you think it will be allowed?

So using the above example, who makes more money off of this?  Is all this worth a 1% return on your retirement?  The government does make more money off YOUR investment, a LOT more money, than you would under it being privatized, and you get a measly 1% return.....  how generous of them.  Or is this an example of "sharing the wealth?"

This also means that all the money that is in the stock market would disappear.  What does one think happens when there is a mass sale of stock?  First the market drops like a bomb, and then secondly, what bank or investment company has the funds to cash up for those sales.  Oh yea, the $700 billion, or rather $1.7 trillion, or rather, whatever number it has grown to today.

Additionally, what would happen if everyone decided to cash out their 401(k)s at one time, thus a "run on 401(k)s"?  First one would have to pay a 10% penalty tax for early withdrawal if one is not 59 1/2 years old, thus the government makes money.  Secondly, you are taxed just like your income tax as pulling out a 401(k) is seen as income.  So thus, the government takes part of your money.  Basically it comes out to right around a 25% loss for early withdrawal on the average overall.  Then of course, is the scenario above where everyone is selling on the market, companies don't have the funds to back up their stock, and around and around we go on the merry-go-round again.  That is, if the Democrats who want your money, don't immediately put restrictions on early withdraws on 401(k)s before this bill ever makes it to the floor.  So if you think companies falling, banks falling and unemployment is bad now.... what do you think will happen if the Democrats seize your 401(k)s?

Also in the discussions, there is the elimination of the 401(k) tax break which has been stated to be around $80 billion.  This means that any money you place into a retirement account is taxable, where as it is now not taxable.  This increases your tax liability and thus your income tax raises.  Additionally, this increases the government's income.

And meanwhile, the government can use your money via the Social Security surplus bill for their own purpose via the Social Security Surplus Bill.

If you ever wondered how the government was going to pay for the bank bailouts, well now you don't have to wonder.


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