From: http://www.carolinajournal.com/exclusives/dems-target-private-retirement-accounts.html
Carolina Journal Exclusives
Dems Target Private Retirement Accounts
Democratic leaders in the U.S. House discuss confiscating 401(k)s, IRAs
By Karen McMahan
November 04, 2008
RALEIGH — 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 managed 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
for 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.
Rep. George Miller, D-Calif.,
chairman of the House Committee on Education and Labor, in prepared
remarks for the hearing on “The Impact of the Financial Crisis on
Workers’ Retirement Security,” blamed Wall Street for the financial
crisis and said his committee will “strengthen and protect Americans’
401(k)s, pensions, and other retirement plans” and the “Democratic
Congress will continue to conduct this much-needed oversight on behalf
of the American people.”
Currently, 401(k) plans allow
Americans to invest pretax money and their employers match up to a
defined percentage, which not only increases workers’ retirement
savings but also reduces their annual income tax. The balances are
fully inheritable, subject to income tax, meaning workers pass on their
wealth to their heirs, unlike Social Security. Even when they leave an
employer and go to one that doesn’t offer a 401(k) or pension, workers
can transfer their balances to a qualified IRA.
Mandating Equality
Ghilarducci’s plan first appeared
in a paper for the Economic Policy Institute: Agenda for Shared
Prosperity on Nov. 20, 2007, in which she said GRAs will rescue the
flawed American retirement income system
(www.sharedprosperity.org/bp204/bp204.pdf).
The current retirement system,
Ghilarducci said, “exacerbates income and wealth inequalities” because
tax breaks for voluntary retirement accounts are “skewed to the wealthy
because it is easier for them to save, and because they receive bigger
tax breaks when they do.”
Lauding GRAs as a way to
effectively increase retirement savings, Ghilarducci wrote that savings
incentives are unequal for rich and poor families because tax deferrals
“provide a much larger ‘carrot’ to wealthy families than to
middle-class families — and none whatsoever for families too poor to
owe taxes.”
GRAs would guarantee a fixed 3
percent annual rate of return, although later in her article
Ghilarducci explained that participants would not “earn a 3% real
return in perpetuity.” In place of tax breaks workers now receive for
contributions and thus a lower tax rate, workers would receive $600
annually from the government, inflation-adjusted. For low-income
workers whose annual contributions are less than $600, the government
would deposit whatever amount it would take to equal the minimum $600
for all participants.
In a radio interview with Kirby
Wilbur in Seattle on Oct. 27, 2008, Ghilarducci explained that her
proposal doesn’t eliminate the tax breaks, rather, “I’m just
rearranging the tax breaks that are available now for 401(k)s and
spreading — spreading the wealth.”
All workers would have 5 percent
of their annual pay deducted from their paychecks and deposited to the
GRA. They would still be paying Social Security and Medicare taxes, as
would the employers. The GRA contribution would be shared equally by
the worker and the employee. Employers no longer would be able to write
off their contributions. Any capital gains would be taxable
year-on-year.
Analysts point to another
disturbing part of the plan. With a GRA, workers could bequeath only
half of their account balances to their heirs, unlike full balances
from existing 401(k) and IRA accounts. For workers who die after
retiring, they could bequeath just their own contributions plus the
interest but minus any benefits received and minus the employer
contributions.
Another justification for
Ghilarducci’s plan is to eliminate investment risk. In her testimony,
Ghilarducci said, “humans often lack the foresight, discipline, and
investing skills required to sustain a savings plan.” She cited the
2004 HSBC global survey on the Future of Retirement, in which she
claimed that “a third of Americans wanted the government to force them
to save more for retirement.”
What the survey actually reported
was that 33 percent of Americans wanted the government to “enforce
additional private savings,” a vastly different meaning than mandatory
government-run savings. Of the four potential sources of retirement
support, which were government, employer, family, and self, the
majority of Americans said “self” was the most important contributor,
followed by “government.” When broken out by family income, low-income
U.S. households said the “government” was the most important retirement
support, whereas high-income families ranked “government” last and
“self” first (www.hsbc.com/retirement).
On Oct. 22, The Wall Street
Journal reported that the Argentinean government had seized all private
pension and retirement accounts to fund government programs and to
address a ballooning deficit. Fearing an economic collapse, foreign
investors quickly pulled out, forcing the Argentinean stock market to
shut down several times. More than 10 years ago, nationalization of
private savings sent Argentina’s economy into a long-term downward
spiral.
Income and Wealth Redistribution
The majority of witness testimony
during recent hearings before the House Committee on Education and
Labor showed that congressional Democrats intend to address income and
wealth inequality through redistribution.
On July 31, 2008, Robert
Greenstein, executive director of the Center on Budget and Policy
Priorities, testified before the subcommittee on workforce protections
that “from the standpoint of equal treatment of people with different
incomes, there is a fundamental flaw” in tax code incentives because
they are “provided in the form of deductions, exemptions, and
exclusions rather than in the form of refundable tax credits.”
Even people who don’t pay taxes
should get money from the government, paid for by higher-income
Americans, he said. “There is no obvious reason why lower-income
taxpayers or people who do not file income taxes should get smaller
incentives (or no tax incentives at all),” Greenstein said.
“Moving to refundable tax credits
for promoting socially worthwhile activities would be an important step
toward enhancing progressivity in the tax code in a way that would
improve economic efficiency and performance at the same time,”
Greenstein said, and “reducing barriers to labor organizing, preserving
the real value of the minimum wage, and the other workforce security
concerns . . . would contribute to an economy with less glaring and
sharply widening inequality.”
When asked whether committee
members seriously were considering Ghilarducci’s proposal for GSAs,
Aaron Albright, press secretary for the Committee on Education and
Labor, said Miller and other members were listening to all ideas.
Miller’s biggest priority has been
on legislation aimed at greater transparency in 401(k)s and other
retirement plan administration, specifically regarding fees, Albright
said, and he sent a link to a Fox News interview of Miller on Oct. 24,
2008, to show that the congressman had not made a decision.
After repeated questions asked by
Neil Cavuto of Fox News, Miller said he would not be in favor of
“killing the 401(k)” or of “killing the tax advantages for 401(k)s.”
Arguing against liberal
prescriptions, William Beach, director of the Center for Data Analysis
at the Heritage Foundation, testified on Oct. 24 that the “roots of the
current crisis are firmly planted in public policy mistakes” by the
Federal Reserve and Congress. He cautioned Congress against raising
taxes, increasing burdensome regulations, or withdrawing from
international product or capital markets. “Congress can ill afford to
repeat the awesome errors of its predecessor in the early days of the
Great Depression,” Beach said.
Instead, Beach said, Congress
could best address the financial crisis by making the tax reductions of
2001 and 2003 permanent, stopping dependence on demand-side stimulus,
lowering the corporate profits tax, and reducing or eliminating taxes
on capital gains and dividends.
Testifying before the same
committee in early October, Jerry Bramlett, president and CEO of
BenefitStreet, Inc., an independent 401(k) plan administrator, said one
of the best ways to ensure retirement security would be to have the
U.S. Department of Labor develop educational materials for workers so
they could make better investment decisions, not exchange equity
investments in retirement accounts for Treasury bills, as proposed in
the GSAs.
Should Sen. Barack Obama win the
presidency, congressional Democrats might have stronger support for
their “spreading the wealth” agenda. On Oct. 27, the American Thinker
posted a video of an interview with Obama on public radio station
WBEZ-FM from 2001.
In the interview, Obama said, “The
Supreme Court never ventured into the issues of redistribution of
wealth, and of more basic issues such as political and economic justice
in society.” The Constitution says only what “the states can’t do to
you. Says what the Federal government can’t do to you,” and Obama added
that the Warren Court wasn’t that radical.
Although in 2001 Obama said he was
not “optimistic about bringing major redistributive change through the
courts,” as president, he would likely have the opportunity to appoint
one or more Supreme Court justices.
“The real tragedy of the civil
rights movement was, um, because the civil rights movement became so
court focused that I think there was a tendency to lose track of the
political and community organizing and activities on the ground that
are able to put together the actual coalition of powers through which
you bring about redistributive change,” Obama said.
Karen McMahan is a contributing editor of Carolina Journal.
