They’re After Your 401(k)

Hold on!  It’s never enough

It’s never enough until your heart stops beating

The deeper you get, the sweeter the pain

Don’t give up the game until your heart stops beating

            —New Order, Shellshock

Do you ever feel like that prehistoric squirrel at the beginning of Ice Age trying desperately to protect against all manner of calamity the one meager acorn he’s managed to save?

I’ve warned before that the Beast was hungry, and it was coming for your 401(k).

Last April I predicted that if Obama were re-elected, one of the things we’d see is the government eliminating the tax deduction for your 401K (at least for higher wage earners), if not retroactively collecting the deferred tax or confiscating your account outright.  Back in August I reported that more and more in the District were starting to pay attention to a proposal by a Dr. Teresa Ghilarducci suggesting the creation of a mandatory federal retirement program to supplement Social Security, which would essentially establish a mandatory replacement for your 401(k)

Well, they’re at it again.

The Brookings Institute has released a report recommending cutting back or eliminating 401(k) tax deductions for higher-income earners.  The concern, apparently, is two-fold.  On the one hand, the 401(k) program is too “costly” an “expense.”  On the other hand, it isn’t achieving its goal of encouraging savings, particularly among lower income workers.  As the report’s author Karen Dynan said:

“We really need to think hard about whether the dollars we are spending are effective at achieving the goals.”

This is juvenile.

To begin with, it’s not an expense.  It’s not.  Allowing you to deduct your 401(k) contribution from your taxable wages is not an expenditure by the federal government; it’s allowing you to keep an added portion of money that’s yours to begin with.  We have to get out of this positively sick mindset that every dollar in existence actually belongs to the Beast, and that to the extent you get to keep anything at all that’s only due to the sacrificial generosity of a government that otherwise has an absolute right to consume it.  Your money is yours, and taxes are the government’s means of confiscating that money from you.  The only “expenditure” in a tax transaction is by the taxpayer.

Second, the 401(k) program and its deduction aren’t really even letting you keep that money.  What they’re letting you do is defer the taxes on that money to a later date—the Beast will still get its slice.  But there’s a significant catch: you can’t touch that money until you turn 59 ½.  And you can’t just hoard it and pass it down to your kids, either; you must start withdrawing it (and paying the taxes on those withdrawals) when you turn 70 ½.  If you violate either rule, there are substantial penalties (and the government still taxes you).  So it’s not like you have free use of that money.

And what’s really silly here is the stated rationale being that low and middle-income earners are still not saving enough, even with the tax deduction incentive.  The proposed solution to this is to eliminate the deduction—for upper-income people.  That’s right: poor people don’t save enough, so we’re going to increase taxes on rich people.

Perhaps I missed something, but how is eliminating 401(k) deductions for the wealthy supposed to increase savings rates among lower-income groups?

No, eliminating 401(k) deductions for the wealthy won’t impact savings by others.  Which is why Senator Dan Harkin (D-IA) plans to introduce legislation this year requiring businesses that don’t offer a 401(k) to enroll workers (with a mandatory company match) in a USA Retirement Fund.  Presumably that would be some sort of federally-managed—you know, because the District is sooooo good at making investments and managing money—retirement account, not unlike the proposal advanced by Professor Ghilarducci.  According to Harkin:

“The dream of a secure retirement is getting fainter and fainter . . . Savings rates are low and there’s no simple way for people to convert their savings into a stream of retirement income they can’t outlive.”

Well, sure there is, Senator: they can save and invest their money—there are oodles of no-load, no-fee, no-minimum-investment mutual funds out there that literally anybody could invest in if they were so inclined—which they’d be in a much better position to do if the District weren’t taking so much of it in the form of Medicare, Medicaid, Social Security, and income taxes.  And, not to put too fine a point on it, wasn’t the solution to this people can’t adequately prepare for a secure retirement problem supposed to have been Social Security, which was a federally-managed retirement account with mandatory participation and employer contributions . . . in other words, exactly what you’re proposing?

If Social Security isn’t solving this problem now, what makes anyone think that a second iteration of it will do any different?

And, as we’re already seeing with Obamacare, this kind of federal effort to force businesses to provide benefits to lower-income employees will end up backfiring.  Businesses that don’t offer 401(k) plans don’t do that because the market doesn’t require it; they are able to maintain an adequate workforce without it.  But once the government compels them to offer the federal plan and make matching contributions, many will conclude that their business economics won’t support that, and they will either begin trimming their workforce or closing their doors altogether; either way, the very people supposedly being helped by this effort end up not only without a retirement savings plan—which they already didn’t have—but also without a job.

Stop helping me already!

But you and I both know at the end of the day this isn’t about trying to ensure everyone has an adequate nest egg.  It’s about trying to find yet another way to generate revenue because the Beast is simply incapable of dealing with its spending problem.  It might be different if these things would make a significant dent in the deficit, but they won’t.  Just like Social Security, Harkin’s proposed program will ultimately become a net drain, between administrative costs and the simple fact that entitlement programs always end up owing more in “benefits” than they bring in.  And eliminating 401(k) deductions will only add an additional $85.8 billion in revenue per year, which is a whopping 9.5% of the projected $900 billion deficit—not the budget, but the budget shortfall—for fiscal 2013.  Put another way, an additional $86 billion covers the Beast’s consumption for about nine days.

The problem isn’t retirement savings; somebody needs to push Miss Piggy away from the buffet table.


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