NEW YORK – When you hear, “Hello, I’m from the federal government and I want to help you manage your retirement savings,” the best advice is to run away, as fast as you can.
In November 2012, WND reported the Obama administration was exploring a creative way to finance continuing trillion-dollar annual federal budget deficits through forcing private citizens holding IRA and 401(k) accounts to purchase Treasury bonds by mandating the placement of government-structured annuities in their retirement accounts.
Two years ago, WND reported the U.S. Department of Labor and the Treasury Department held joint hearings on whether government lifetime annuity options funded by U.S. Treasury debt should be required for private retirement accounts, including IRAs and 401(k) plans.
It looks like that day is getting closer.
Packaged as a new retirement-savers plan designed for workers whose employers do not offer IRAs or 401(k), President Obama announced in his State of the Union address Tuesday an initiative that allows first-time savers to start building up their savings in Treasury bonds that could eventually be converted into traditional IRAs or 401(k) plans.
While it is not as onerous as an Obama administration directive demanding a certain percentage of individual retirement savings must be invested in U.S. Treasury bonds, it is a first step in that direction.
With the Obama administration having run federal budget deficits in the range of $1 trillion every year in office since 2009, and with the Federal Reserve announcing a new policy to “taper” Quantitative Easing by buying $10 billion a month less in U.S. government debt every month this year until QE hits zero, somebody has to buy all the Treasury debt the Obama administration plans to issue.
In January 2013, the U.S. Consumer Financial Protection Bureau suggested it should play a role in helping Americans manage the $19.4 trillion they have put into retirement savings.
“That’s one of the things we’ve been exploring and are interested in terms of whether and what authority we have,” bureau director Richard Cordray told Bloomberg in an interview.
Under the direction of the Obama White House, the Treasury and Labor departments have increasingly pushed the 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.
The government’s argument is that IRA and 401(k) investors lost principal from their retirement savings accounts when the housing bubble burst and the Dow Jones Industrial Average fell from a closing high of 14,164.53 on Oct. 9, 2007, to a closing low of 6,547.05 on March 9, 2009.
Fidelity Investments estimated the average 401(k) fund balances on the approximately 11 million accounts Fidelity manages dropped 31 percent to $47,500 at the end of March 2009, from $69,200 at the end of 2007.
Yet, with the stock-market rally that began in March 2009, Fidelity noted 401(k) account balances increased 28 percent, from a low at the end of the first quarter 2009 of $47,500 to an average of $60,700 by the end of the third quarter 2009.
With the Dow going over 16,000 in the extended rally since 2009, most IRA and 401(k) investors have registered substantial gains, but that could change.
WND has reported that should the stock-market rally turn into yet another financial bubble that bursts, retirement savers with IRA and 401(k) money invested in the stock market could again take serious losses that may take years of patience to regain.
U.S. to follow path of Argentina?
Unfortunately, retirement savers in other nations with high debt that have demanded retirement savings be placed into government debt have fared badly, taking huge losses as debt crises deepened and bond markets began selling the debt at serious discounts.
Writing in the Telegraph of London in October 2008, business and economics editor Ambrose Evans-Pritchard warned that G7 nations, including the United States, may begin following the path of 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, with the result 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.”
“It is a foretaste of what might happen across the world as governments discover that tax revenue,” he said.
With the Treasury needing in fiscal year 2010 another $1.4-$1.5 trillion in debt to finance the anticipated federal budget deficit, the Obama administration is obviously scrambling to find new ways to sell government debt cheaply, without having to raise interest rates.
As WND reported last September, Poland confiscated one-half of all its citizens’ private pensions in a move to cut the nation’s debt crisis.
Reuters reported Sept. 4, 2013, Polish Prime Minister Donald Tusk announced a government decision to transfer to ZUS, the government pension system, all bond investments in privately owned pension funds within the state-guaranteed system.
For the time being, the Polish government continued to allow private citizens to keep equity investments that in the Polish state-guaranteed pension system tend to be approximately half of all private pension investments.
Polish Finance Minister Jacek Rostowski said the change will reduce Polish national debt about 8 percent of Polish Gross Domestic Product, or GDP. The move allows the Polish government to resume another round of aggressive debt creation by borrowing in international markets, as reported by ZeroHedge.com.
By confiscating, or otherwise “nationalizing” the bonds held in Polish citizen private retirement accounts, the Polish government, with public debt currently standing at approximately 52.7 percent of GDP, circumvents two threshold restrictions that deter the government from allowing debt to rise to over 50 percent of GDP. A second deterrence kicks in when Polish national debt hits 55 percent of GDP.
Reuters pointed out that by shifting bonds held in private retirement accounts into ZUS, the government can book the assets on the state balance sheet to offset public debt, giving the government more scope to borrow and spend.
As is the case with other nations in the European Union, Poland faced with slowing economic growth, a grim job situation, and declining tax revenues, has been forced to borrow to maintain the nation’s large social welfare system without imposing austerity measures.
The international reaction among private investment advisers was one of shock and dismay.
Poland’s move follows a similar move taken by the Mediterranean island of Cyprus earlier this year. The Cyprus government confiscated 10 percent of the amount in all bank accounts in a move calculated to raise 6 billion euros to meet a condition set by international bankers, including the International Monetary Fond, as a condition of finalizing a proposed Eurozone bailout.