The federal government is refusing to confirm it wants to create new "Retirement Bonds" to be purchased – mandatorily – with the assets in private Individual Retirement Account and 401(k) programs, but it appears to be moving that direction.
Treasury officials declined to rule out the possibility of creating R-Bonds as they confirmed a joint hearing scheduled with Treasury Department and Department of Labor officials in September will explore the "lifetime income option" for Americans using their retirement accounts.
WND reported last week that the U.S. Department of Labor released an agenda for a joint hearing Sept. 14-15 on whether government life-time annuity options funded by U.S. Treasury debt should be required for private retirement accounts, including IRAs and 401(k) plans.
WND reported in January that J. Mark Iwry, deputy assistant Secretary for Retirement and Health Policy at the Department of the Treasury, had been working with Assistant Labor Secretary Phyllis C. Borzi to develop the idea of structuring a government annuity, a "lifetime income option," as a mandatory element of IRAs and 401(k) plans, with the investment required to be in Treasury debt.
WND asked Treasury and the Department of Labor if the plan was to develop a new Retirement Bond, or Treasury R-Bond for this purpose, as was suggested by an Investment News report published last year.
"So far we haven't put forth any proposals for an R-bond or other similar options, so there's nothing really to tell you on this subject," Treasury spokeswoman Sandra Salstrom told WND via e-mail.
But she confirmed that discussions about a "lifetime income option" within private retirement accounts would be held during the meetings.
"That's the purpose of the joint hearing next month [Sept. 14-15]," she replied, "and we're not going to get ahead of that."
The Department of Labor told WND such plans or proposals would come from the Treasury Department under Treasury Secretary Timothy Geithner.
Why 'R-Bonds'?
Treasury and Labor appear to be pursuing an investment theory that because government bonds carry a sovereign guarantee against default, any IRA or 401(k) funds placed in a Treasury R-Bond would constitute, in effect, a government annuity that would pay the retiree a lifetime income, regardless how stock and bond markets might independently perform.
Still, a sovereign guarantee is only valid as long as the government does not default on bond payments or otherwise debase the currency. This could be done, for instance, by printing money and "monetizing" the nation's debt, so that dollar benefits ultimately paid out in R-Bonds might be in devalued dollars with considerably less purchasing power than the dollars used to buy the R-Bonds in the first place.
Nor does a "sovereign guarantee" insure the holder of an R-Bond from secondary market risk should the bond need to be sold prior to maturity at a time when the value of the bond is less than the par value stated on the bond when it was purchased.
Under current rules, IRA and 401(k) plans can invest in Treasury debt, even though few retirement plan investors typically choose to do so given the relatively low interest Treasury debt typically pays compared to alternative investment options, including other non-government-issued Triple-A bonds.
Following the lead of Argentina
But writing in the London Telegraph in 2008, business and economics editor Ambrose Evans-Pritchard warned that G7 nations, including the U.S., might follow Argentina in forcing privately managed pension funds to be invested in government-issued debt.
In 2008, Argentine sovereign debt was trading at 29 cents on the dollar, reflecting the devalued state of the Argentine peso. The result was that private pensioners holding government debt in their retirement accounts could not be assured those bonds would have any meaningful value at maturity.
"Here is a warning to us all," Evans-Pritchard wrote. "The Argentine state is taking control of the country's privately managed pension funds in a dramatic move to raise cash."
He warned the same could happen in the U.S. and Europe, writing, "The G7 states are already acquiring an unhealthy taste for the arbitrary seizure of private property, I notice."
With Treasury needing to sell during fiscal year 2010 another $1.4 trillion to $1.5 trillion in debt for the Obama administration's budget deficits, administration officials are scrambling to find new ways to sell government debt cheaply without having to raise interest rates.
John Kerry and 'Automatic IRAs'
As WND reported, Sen. John Kerry, D-Mass., has introduced S.3760, entitled "Automatic Act of 2010," co-sponsored by Sen. Jeff Bingaman, D-N.M.
The bill is currently before the Senate Finance Committee.
On Aug. 10, Rep. Richard Neal, D-Mass., introduced companion legislation in the House, H.R. 6099, with three co-sponsors, Reps. Earl Blumenauer, D-Ore., Allyson Schwartz, D-Pa., and Pete Stark, D-Calif.
In the House, the proposed legislation is before the House Ways and Means Committee and the House Education and Labor Committee.
The goal of the legislation is to force employers at companies that do not sponsor a retirement plan to enroll all employees in an "Automatic IRA," into which the employer will be required to contribute 3 percent of the employee's salary.
Under the Kerry-Bingaman plan, in the first year of enactment, private companies with 100 or more employees automatically would be enrolled in government-mandated IRAs, forcing these businesses to contribute on behalf of their employees a "default amount" equal to 3 percent of an employees pay.
Employees would be allowed to raise or lower their contributions or opt-out of the plan.
In the second year, companies with 50 or more employees would be required to provide Automatic IRAs; in the third year, 25 or more; and in the fourth year, 10 or more.
Workers 18 years old or older and employed for at least three months would be automatically enrolled.
But the Automatic IRAs would be permitted only to invest in options determined by Treasury and Labor guidelines, such that a mandatory investment option would include a "principal preservation fund" that would have to invest in a newly created Treasury Retirement Bond, the "R-Bond," designed for use with an Automatic IRA.
Section 440(d)(1)(A) of the proposed Kerry-Bingaman legislation would allow all employee and employer contributions in the Automatic IRA to be invested directly in government-issued retirement bonds.
How big are private retirement savings?
Under ERISA, the Department of Labor regulates approximately 700,000 private pension plans, with approximately $4.7 trillion in assets.
The Investment Company Institute estimates that IRA assets have grown from $25 billion in 1980 to a peak of $4.747 trillion by the end of 2007, declining to $3.613 trillion in 2008.
For 401(k) plans, the ICI estimate a peak of $3.025 trillion in total assets was reached in 2007, declining to $2.350 trillion in 2008.
The ICI estimates that total U.S. retirement assets decreased to $14.0 trillion in 2008, down 22 percent from the peak of $17.9 trillion in 2007.