Democrats plan to tap your private retirement plan to fund Barack Obama’s many promises to expand the power and size of the federal government.
Your pre-tax annual contribution to a 401(k) will be taxed under a plan considered by House Education and Labor Committee Chairman George Miller, D-Calif., and Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Subcommittee on Income Security and Family Support.
Worse yet, instead of the familiar, tax-deferred plan which typically invests in diversified mutual funds, in turn investing in private companies, these Democrat leaders want to create a new system of mandatory worker-retirement accounts which would invest only in government debt (bonds) and yield 3 percent per year.
In other words, Miller and McDermott want to redirect trillions of dollars of workers’ savings from private investments to fund the ballooning government deficit.
In 2008, a typical 401(k) plan (there are many variations) allows an employee to contribute up to $15,500, often matched in whole or part by a corresponding contribution from the employer. Most plans are participant directed, meaning the employee selects from an assortment of mutual funds for diversified investment in stocks, bonds and money market investments.
Of course, this year the best advice financial planners can give you is: Don’t even look at that 401(k) earnings statement! The Panic of ’08 has crashed stock markets all over the world. More than one-third of the value of all 401(k) accounts has evaporated. It’s not much comfort to those thinking of retiring this year or next, but these stock markets will come back. They always have, despite wild fluctuations, the value of stocks overall rises over time.
Democrats Miller and McDermott offer a tantalizing alternative to stock market uncertainty.
They would eliminate the annual tax deferral for 401(k) contributions, which reduces federal revenues by about $80 billion per year. Instead, they propose that the federal government pay every worker $600 per year (inflation adjusted each year) and require every worker to invest 5 percent of their after-tax pay into a new retirement account to be administered by the Social Security Administration. The money would be invested in a new class of government bond which would yield 3 percent per year, adjusted for inflation.
This plan was originally proposed by Theresa Ghilarducci, professor of economic policy analysis at the New School for Social Research in New York, and presented to Miller and McDermott last week at a House hearing.
These liberal Democrats thought the plan ingenious. They could take over the largest pool of private savings in the U.S., redirecting some $3 trillion to government spending.
In one move, the hated private market would be deprived of the capital that makes “capitalism” possible, and the government would have the money to fund the massive expansion of government programs, subsidies and tax “cuts” promised by Barack Obama.
And, as with Social Security itself, the government could borrow and spend all the annual proceeds over and above any payout to retirees.
The history of the federal government raiding the Social Security fund provides a warning to anyone seduced by the promise of government guaranteed retirement funds.
In 1967, President Lyndon Johnson promised “guns and butter” (i.e. money to fight the Vietnam War would not be raised by higher taxes on consumers, but by “borrowing” money from Social Security not used that year for retiree payout).
The federal government has borrowed this annual “surplus” every year since. With the number of retirees growing, and the benefits expanded by Congress over the years, this “surplus” turns deficit in a few years – with no accumulated, invested trust fund to pay the retirees. What’s left in the fund is the government promise to pay but no money.
Obama has promised to solve this problem by making “rich people” pay more into Social Security while reducing their benefits, transforming a retirement plan into a wealth transfer plan.
The Miller/McDermott plan creates a new government-guaranteed retirement plan to begin the scam all over again.