Confiscation of Your Retirement Account

This meme—government confiscation of retirement accounts— is rapidly gaining credence. On November 4, Carolina Journal Online reported that Democrats have been meeting to discuss transferring currently-voluntary private retirement accounts to eventually-mandatory government administered retirement accounts that would produce a guaranteed rate of return. Further, the now tax-advantaged plans would lose tax incentives and deductibility.

On the surface, this doesn’t look very appealing. However, there are two ways to look at this plan: 1) protection of retirement accounts to the tune of a guaranteed 3% per annum; or 2) confiscation of retirement accounts to the tune of loss of control and, effectively, loss of ownership.

As currently being discussed, the plan would entail transferring private retirement plans, such as IRAs and 401ks that are invested in stocks and bonds, into government retirement accounts (GRAs). These new accounts would be invested in newly-created government bonds yielding 3%, adjusted for inflation.

Further, the current tax-advantaged, voluntary plan would become a mandatory savings of 5% of wages with no tax deduction for either the employee or employer. These accounts would be administered by the Social Security Administration. Actually, the money would not be invested in government bonds, per se, but would earn “pension credits.” The wage earner would continue to pay into Social Security and Medicare. To make this more palatable, the transfer price might be calculated at market prices pre the recent cliff dive, assuming that it would be put into effect this year.

But wait a minute, there’s another way to look at this proposal. In her report, Ghilarducci said that “GRAs would guarantee a fixed 3% annual rate of return (vs. the volatility of returns in the capital markets, which have devastated savings this year). In place of tax breaks workers now receive for contributions and thus, effectively, a lower tax rate, workers would receive a $600 annual contribution 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. 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.”

For more information, see: US Congress Committee on Education and Labor hearing on October 7, 2008 “Saving Retirement in the Face of America’s Credit Crises: Short Term and Long Term Solutions” testimony of Economics Professor Teresa Ghilarducci on “The Impact of the Financial Crisis on Workers’ Retirement Security.”

This proposal is similar to Argentina’s recently announced plan and we don’t hear any crying down there. Rock throwing and other expressions of civil unrest, but not crying; and a stock market crash; and money escaping the country; and, what else, oh yeah, increased likelihood of sovereign default.

Buck up, Americans, this is what you can do for your country.

mg