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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Social Security (Reprise)

You don’t have to call me “Darling,” Darling

You never even called me by my name.

            —David Allan Coe, You Never Even Called Me By My Name

As always, the academics know better than you do.

I predicted a few months ago that one of the things we’d see if Obama is re-elected is a government push to appropriate your retirement savings.  Well don’t look now, but something similar is already brewing (h/t Andrew Wilkow of Sirius/XM’s Wilkow Majority for cluing me in to this).

On July 21 the New York Times published an opinion piece entitled “Our Ridiculous Approach To Retirement” by Dr. Teresa Ghilarduccia double-dip Cal-Berkeley graduate, career academic, and currently the Irene-and-Bernard-L.-Schwartz-Chair-of-Economic-Policy-Analysis-and-director-of-the-Schwartz-Center-for-Economic-Policy-Analysis-in-the [breathe] Department-of-Economics-at-The-New-School’s-New-School-for-Social-Research.  In this piece she reiterates the theory that’s apparently has been her life’s work to promote: we need a second Social Security program.  Not a new one to replace the old broken one, but in addition to it.

Oh, she doesn’t call it “Social Security.”  She calls the fruit of her proposed program “guaranteed retirement accounts.”  These guaranteed retirement accounts are managed by the Social Security Administration, funded through mandatory contributions (read: taxes), magically generate a guaranteed rate of return, and pay an annuity for life.

Kind of, like, I don’t know . . . Social Security???

Her premise is that, left to our own devices, we don’t/can’t/won’t save enough to provide for our own retirement.  Citing “new research” from the Schwartz Center for Economic Policy Analysis of which she is the director—I love it when academics cite themselves as authority to support their arguments—Dr. Ghilarducci claims that 75% of Americans approaching retirement have less than $30,000 in their retirement accounts.  She then recounts what she says is a common cocktail party conversation she has with friends who want to talk about their retirement plans:

I repeatedly hear about the ‘guy.’  This is a for-profit investment advisor, often described as ‘I have this guy who is pretty good, he always calls, doesn’t push me into investments.’  When I ask how much the ‘guy’ costs, or if the guy has fiduciary loyalty—to the client, not the firm—or if their investments do better than a standard low-fee benchmark, they inevitably don’t know.

The problem, she explains, is that it’s simply impossible for us mere mortals to make adequate retirement preparations, with or without the “guy.”  To do that, she says, we’d have to have the omniscience to know when we’re going to be laid off—because that, of course, is guaranteed—when we’re going to die, how to make the perfect investments to beat the market, etc.  The condescension practically drips off the page.  You’re simply too stupid to do it yourself.  And, of course, the perfect proof of this is the statistical analysis showing that most people have very little in their retirement accounts.

I’m not going to challenge her numbers.  My point is this:  what did you expect?  The whole idea  of Social Security in the first place was to make adequate savings and investments to provide people’s retirement arrangements for them.  If it worked as advertised, why would you expect anyone to have any separate retirement account at all?  That was supposed to already have been taken care of by the government.

Of course, the notion that your money is sitting in a Social Security trust fund account just waiting for you to retire is a fantasy long ago debunked.  But notice that her position is self-defeating.  She looks at the less than $30,000 75% of people have saved over and above Social Security and says that because that’s inadequate to provide for their retirement needs, the 401(K) model of relying on private citizens to be responsible for themselves is a failure.  But if the savings over and above Social Security is inadequate—and therefore a failure—then Social Security itself is a failure as a means of providing for people’s retirement.  Yet her solution to this problem is to double-down with another government-managed “investment” program that’s indistinguishable from the one she effectively admits is already inadequate (not to mention insolvent).

How much more do you suppose would be in the average retirement account if the government weren’t already taking 4.2 cents out of every dollar people earn supposedly to “invest” on their behalf?  For an average wagearner making $50,000 a year that’s $2,100 a year he could have invested himself.  Actually, it’s worse than that, because his employer is forced to kick in another $3,100 that could have been paid to the employee as additional wages.  So as a result of the existing Social Security program, this average wagearner is really being deprived of as much as $5,200 a year.  If even half that were saved and invested at, say, a 5% return, over a 40 year working life that’s an additional $314,079 that would appear in that employee’s retirement account.

But that employee doesn’t have that money to invest, because the government took it from him.  And the sick part is, once they’ve taken it, for all the lip service that it’s being put in an account, and it remains his money, you and I both know that’s simply a lie.  He’s never going to get that money back.  If he dies before he qualifies to receive benefits, do his wife and kids get that account?  Do they get back the money he put in?  Of course not.

All Dr. Ghilarducci’s proposal does is duplicate the existing system to take even more from every wagearner.  But what makes her think that’s going to work this time any better than it did the last time?  She can’t possibly “guarantee” a rate of return—because that’s derived from the inherent risks in investing—unless she plans to (a) subsidize the accounts when the investments suffer losses, (b) simply declare that the accounts have more money in them tomorrow than they do today, thus inflating/devaluing the currency (you have more dollars, but they’re worth less), (c) supplement the returns in older accounts with the contributions being made into newer ones (see Ponzi, Charles) or (d) some combination of the above.  That’s the very government-management mechanism that’s rendered the existing Social Security system insolvent and unsustainable.  It doesn’t get any better just because it’s the second time around.

And why is it always a one-size-fits-all mandatory solution with these people on the Left?  The idea that because some people are irresponsible and don’t plan for their own retirement means that all people are, is nonsense.  We’re planning and saving for retirement outside of Social Security (in fact based on the assumption that it won’t even exist) in my house.  Well, Rusty, that’s easy for you, you’re a rich lawyer.  I don’t know about that, but my college professor mother and stepfather managed to make their own retirement savings plans, and they’re hardly part of the evil 1%.  My dad and stepmother (a cop and a hospital social worker, respectively) are doing it.  My in-laws (career chemical plant workers) have done it.  Why can’t those of us who are willing to take responsibility for ourselves opt out and do that?  All she’s doing is substituting her “guy” for our “guy.”

The answer is simple, and Dr. Ghilarducci herself alludes to it: because a voluntary government system would be “a disaster.”  Why?  Because no one with the means to provide for themselves would participate.  And it’s this truth that exposes Social Security Part Deux for the socialist façade that it is (just as Social Security Part Un was).  A voluntary system would leave her with no contributors to cover for her annuity payments to those who, due to time or income constraints, didn’t pay enough into the system to cover what they take out.  In other words, no wealth to redistribute, and less for her and her ilk to control.

Better keep an eye on this one.

Yes, Mr. Gleckman, Social Security Is A “Ponzi” Scheme

“A rose by any other name would smell just as sweet.”

—William Shakespeare, Romeo and Juliet

The sheer stupidity and/or nefarious semantic games of the Left never ceases to amaze.

In a September 8 piece at Forbes.com, contributor Howard Gleckman purports to take Governor Perry to task for what Gleckman calls Perry’s “loony” labeling of Social Security as a “Ponzi” scheme and a “monstrous lie.”  Although Gleckman acknowledges that the program is underfunded, he says Perry is wrong on both counts because according to the Social Security Trustees’  2007 Report it will still be able to pay young people 70-75% of their promised benefits.  To him, that’s “pretty close” to meeting 100% of the program’s promise, and therefore Perry’s rhetoric is simply an idiotic impediment to fixing the system’s obvious fiscal problems. 
Thanks for clearing that up, Howard.  That’ll make my kids feel soooo much better. 
At a certain level it doesn’t matter, but Governor Perry is correct.  Social Security is a Ponzi scheme, and it is a lie, not just to our kids, but to everybody.  And I have no idea why he’s now backing off the point just because some have criticized his use of the term. 
Let’s review a little history. 
The term “Ponzi scheme” refers to a con game—read:  fraud—made famous in 1920 by swindler Charles Ponzi, and later perfected by Bernie Madoff.  The details and window dressing can be customized—in Ponzi’s case it was selling investments in a company that was supposedly engaging in a kind of international postal arbitrage—but the guts are always the same.  As the Securities and Exchange Commission defines it: 
“A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”   
So a Ponzi scheme has three defining elements:
(1)        Payment of purported returns
(2)        To existing investors (that is, people who have already paid in)
(3)        Out of money paid in by new investors. 
Now, Social Security was born in 1935, and the idea was that people would pay into the system and the government would (snicker) hold the money in a trust fund where it would earn interest, and then return the money and the earned interest to the contributors over time upon their retirement.  
No, really (snicker).   
In practice, however, early recipients received benefit payments well in excess of their contributions (in itself a classic symptom of a Ponzi scheme).  By 1937 the Supreme Court held in Helvering v. Davis that the program was constitutional because both employees’ and employers’ contributions were in fact just taxes that flowed into general revenue, thus destroying the “trust fund” myth.  Ida Ludlow, the first recipient of monthly benefits, paid a total of $24.75 into the system, but her first check in 1940 was for $22.54, and she ultimately received over $22,000 from the system.  What this means is the program has necessarily always funded benefits (i.e., paid “returns”) to current recipients (i.e., existing investors) out of the contributions of current workers (i.e., new investors), a fact confirmed by the very 2007 trustee report upon which Gleckman relies: 
Even if a trust fund’s assets are exhausted, however, tax income will continue to flow into the fund.  Present tax rates would be sufficient to pay 75 percent of scheduled benefits after trust fund exhaustion in 2041 and 70 percent of scheduled benefits in 2081. 
Mr. Gleckman, that’s what a Ponzi scheme is. 
Well, yes, it “looks like” a Ponzi scheme, but it really isn’t, and if you just understood risk and insurance you’d see that.  Um, no.  The recent debt ceiling and deficit discussions should have made abundantly clear that the federal government’s capacity to take and borrow is not infinite.  Sooner or later, the program has the same risk of collapse that Ponzi’s stamp operation did.  Nor is Social Security like insurance where risk of some negative event is spread over a number of people most of whom will never need to collect.  Insurance is a wager; it’s a hedge against the happening of an event.  Social Security is a retirement program—well, technically, it’s a tax, see Helvering–it was supposed to be an investment upon which the contributors planned to reap a return in their old age, not a hedge in case they lived past retirement age. 
The fact of the matter is Social Security is, and almost from its inception has been, structured to pay current recipients out of the current contributions, not out of profits generated from investing current recipients’ past contributions.  That’s what a Ponzi scheme is.  That by 2041 the program will be able to pay 75% of promised benefits doesn’t change its fundamental structure as a Ponzi scheme, nor does it make it OK.  The system is going to take people’s money with a promise of X, then deliver 75% or less of X out of money it takes from someone else.  And 25% of a lie is still a lie.  
Furthermore, the 2007 trustee report upon which Gleckman relies predates last year’s payroll tax reduction (which cut contributions into the program by an estimated $120 billion) and the current recession.  The 2010 Report Gleckman says “isn’t much different”—query, if that’s so, why he didn’t just use it; maybe because the 2010 report has the program exhausting its assets in 2037, four years earlier than the 2007 report projected?—likewise doesn’t account for the payroll tax cut.  For political reasons, however, I suspect congressional Republicans will have to go along with Obama’s proposal to extend the payroll tax reduction, despite it being opposite of the Social Security Trustees’ obvious recommendation (both in 2007 and in 2010) to try to restore the program’s fiscal sustainability.  So the real long term picture for the program is considerably worse than even what is reflected in the current trustee report.   
Call it what you want.  The bottom line is that the idea that Social Security is some kind of retirement “insurance” is and always has been a lie.  It doesn’t pay you “benefits” earned from investing your contributions to the program.  What Social Security does is take your money by force and give it to your parents, then take your kids’ and your grandkids’ money–again, by force–and give it to you.  As I posted here, even Genius Joe Biden recognizes that a system like this depends on there being enough children to contribute in the future for it to survive.  With lower birthrates in the post-boomer era meaning there are fewer and fewer to pay in, the program sooner or later faces collapse under its own weight. 
Smells like a Ponzi scheme to me, but the real question is this: 
How much better off would we all be if instead of taking our money from us the government let us keep our money and invest in our own retirement, and let our employers keep their money and invest in their businesses (or, God forbid, increase wages)?

Keep Talking, Joe

“I wonder if the lion be to speak—No wonder, my Lord; one lion may, when many asses do.”

—William Shakespeare, A Midsummer Night’s Dream
Some of you are going to gag when you read this, but I have to be honest:
I love it when Joe Biden talks.  Seriously. 
Unlike Maureen Dowd or Paul Krugmann, neither of whom can I even bring myself to read anymore, I can’t get enough of the Vice President, and as far as I’m concerned, we should pay to have him miked and recorded 24/7.  Every time he opens his mouth, pure gold spews forth, and you know that down at Obama Manor the Monarch-In-Chief is throwing a 7-iron at a Secret Service agent:  Can’t someone put a #@*%$#% teleprompter in front of that @%&#%$* ?!?
It seems Genius Joe was in China this week to . . . wait, does anyone know why, exactly, the Vice President was in China, other than with everyone else having skipped town it seemed dangerous to leave him in the District by himself?  Like so much else with this rudderless administration, there doesn’t seem to have been a particular agenda or purpose for sending Biden to China.  But there he was, giving a speech in which he at least gave the appearance of expressing no criticism of China’s one-child-per-family policy:
“You have no safety net.  Your policy has been one which I fully understand—I’m not second-guessing—of one child per family.  The result being that you’re in a position where one wage earner will be taking care of four retired people.  Not sustainable.”
In its backpedaling, the Vice President’s office points out that Biden’s remark was made in the context of explaining that the policy is economically unsustainable in relation to China’s entitlement programs.  Which is interesting, given that he told U.S troops in Japan yesterday that “I didn’t come [to Asia] to explain a damn thing.”  Well, whatever Biden was doing, what he didn’t do was say, as his office has later claimed is his position, that he finds China’s one-child policy “repugnant.”  He said he “fully understand[s]” it, and he’s “not second-guessing” it.  Not a lot of gray there.
Even if we accept that he wasn’t affirmatively endorsing China’s one-child policy, to say that Biden’s statements were colossally stupid and insensitive would be putting it mildly.
As an initial point, I don’t understand his math.  Two parents plus one child equals three people.  How does he get to one wage earner taking care of four retirees (for a total of five)?  Maybe he’s assuming that the parents later divorce and enter into same-sex relationships all under the single child’s household.  Or something like that.
More substantively, Biden is, of course, ignoring the well-documented human rights travesty the Chinese policy has been:
·     Quotas for abortions and sterilizations imposed on counties failing to enforce the policy;
·     Forced late term abortions against the mother’s will;
·     Post-birth infanticide;
·     Preferential abortions/infanticide to favor survival of male children over female;
·     Razing of homes and imposition of exorbitant fines as enforcement measures;
·     Governmental “erasure” of children born in violation of the policy.
So let me get this straight, Joe.  We’re going to stop the oil industry from producing domestic oil and creating jobs in the U.S. in order to save the Lesser Prairie Chicken and Sand Dune Lizard, but you’re not going to second guess a regime that has an official policy of forced abortion, sterilization, and outright killing of innocent children.  And the Chinese policy is particularly atrocious as to little girls.  Were such a policy in place in the U.S. at the time they were born, women like Margaret Sanger wouldn’t be here. 
Where is NOW when you need them? 
When Joe Biden speaks in his official capacity as Vice President on official White House business, he is legally acting as an agent of the Obama administration, and as such his words are directly attributable to Obama as though Obama said them himself.  This wasn’t some trivial gaffe like misspeaking about the number of states in the Union or confusing Elvis’ birthday with the anniversary of his death.  Biden didn’t just get his facts mixed up because of jet lag.  He could simply have said that the current Chinese policy results in too few children to support too many retirees and as such is unsustainable.  It wasn’t necessary for him to preface his comments on the economic consequences of the one-child policy with a caveat that he doesn’t second-guess the substance of the policy itself.  But he did.  And in doing it he exposed himself and this administration. 
Biden said children are an entitlement program safety net, not human beings.  By saying that out loud he conceded what many of us have understood all along that what people like him on the Left are about is shameless self-gratification now, with the consequences to be borne by someone else later.  Rather than you being responsible and saving for your own retirement, or at least the government saving the money it takes from you for that purpose and returning it to you in your retirement—remember, that’s what Social Security was supposed to have been—Biden’s idea is that government should spend the money it takes from you on other things now, and then count on each generation producing more children to pay into the system than the number of that generation who will live long enough to draw from the system later (that’s the illegal con game called a Ponzi scheme, for you uninitiated).  A government policy like China’s limiting the numbers in each future generation, isn’t a problem because of the human cost of killing innocent children; Biden—and by extension Obama—is “not second-guessing” that.  It’s a problem because it jeopardizes the entitlement system.
This is why the system is broken.  It was designed from its inception as the mother of all frauds, to be borne on the back of a child. 
Talk, Joe.  Talk.