Friday, November 14, 2008

Some Members of Congress Are Considering Eliminating 401(k) Plans

I was reading the most recent issue of Forbes magazine today (dated November 24, 2008) and saw a blurb by one of the columnists who claimed that some members of Congress are considering legislation that would abolish 401k plans. I assumed that was probably mere hyperbole. However, I did some Internet searching and discovered that it is true!

High ranking democrats in the House of Representatives are exploring the possibility of eliminating $80 billion in "tax breaks" on 401(k) plans. Eliminating such tax breaks would mean that money investing in 401(k) plans would no longer be pre-tax. It's a bit of a misnomer to call these "tax" breaks, in my opinion, seeing as how money invested in 401(k) plans is eventually taxed when it is withdrawn from the plan. Accordingly, money invested in 401(k) plans is merely tax-deferred - it's not as though the money is just never taxed at all.

House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are apparently pushing to remove the tax-deferral status of 401(k) plans and would like to implement a new system of guaranteed retirement accounts to which all workers would be required to contribute.

Teresa Ghilarducci, a professor of economic-policy analysis at the New School for Social Research in New York, has drafted a plan that is being considered by Miller and McDermott, among others. Under Ghilarducci's plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5% 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 a pay 3% a year, adjusted for inflation.

I realize that the stock market returns over the past decade have been pathetic, but locking everyone into a plan that only returns 3 percent a year and forcing everyone to invest 5% of their salaries in it is ridiculous! Since 1926, the U.S. stock market has returned an average of close to 10% per year, or around 7% in real terms when accounting for inflation. Forcing a 25 year-old worker, for example, to pay into such a system for the next 40+ years with such low returns seems like a complete waste of financial resources.

This would be a dramatic expansion of the current Social Security system. It is obvious that the current Social Security system has major problems and may at some point in the near future run out of money. Expanding such a pension-type of welfare system would be one of the stupidest things that the morons running Congress could possibly do. I really hope that this plan doesn't get much support in Congress and it it does, I hope that the new president Obama has the wise judgment to reject such a wasteful and expensive plan.

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