Coming to your email in-box: The Democrats plan to seize your 401k.

I know this because I’m on the Texas Republican Party email list. See, I sent them $1.00 about ten years ago so I get all the stuff they send out. They’ve probably spent $300 in postage on me, not counting printing costs and such.

Anyway, their latest e-newsletter lead with the headline that 401k plans will be seized by the Democrats. It’s utter bull pucky, there is no such plan. I’ll explain the small kernel of truth this lie is wrapped in down page.

First a few facts:

The only retirement vehicle that paid as it was expected to over the last 10 years is Social Security.

Social Security is the largest source of income for 54% of retired Americans.

22% of current retirees cite retirement accounts (IRA, 401k, Keogh) as a major source of income although 45% of current workers think it will be a major source.

37% of current retirees receive pension funds and only 23% of current workers have a pension plan.

From there the percentages for non SS funds get close to single digits.

38% of current workers pay into a 401K. 50% of all 401K funds will go to 6% of workers.

401K account’s values are down 20% from their value in 2000. That’s a bit of a bounce back from as much as a 50% loss.

The return on 401k investments is far lower than most people think. Most people think the average return is 10% a year. After broker fees and management fees the return is much lower. I have no firm numbers but speculate that the return varies from 5% to 7% depending on the plan (unless your employer matches your contribution in which case there is a 100% return on investment! Sweet if you have it). Unless, like in 2000, the stock market crashes in which case return is only 1%.

Tax breaks for 401k plans cost the government $110 billion in 2006. Savings for retirement, which they were designed to stimulate, have not increased as a result of that tax deduction.

Okay, so why are the Repubs barking about seizing your 401k. Because a professor of social economics testified before congress on a possible plan to change retirement plans to cover more people and eliminate the volatility of funds for most Americans. No bill is being discussed and none is anticipated. It’s part of Congressional research.

BUT, what is that plan like?

First the tax deduction for 401k contributions would go away. That $110+ billion would fund an annual $600 federal donation to a Guaranteed Retirement Account (GRA) administered by the Social Security Administration. The worker would then add 5% of their income to that account. The account would pay a guaranteed 3% interest return with the 3% being self-funding. All numbers are to be inflation adjusted. If a worker at 25 years of age began that program now, at age 65 his retirement (GRA plus Social Security) would be 70% of the worker’s highest earned income.

The only thing this would change is the tax deduction for 401k plans. People can still invest in whatever retirement or savings plan they want. However, because most retirement accounts are diversified with part going into low risk/low return investments that portion could be shifted into high risk/high return because the GRA would replace that “safe” portion of the portfolio.

It would be a no lose program. The wealthy with investment portfolios could shift more $ into high to moderate risk for a better return, those making less than $100,000 a year would have a comfortable guaranteed and safe retirement at 70% of earned income and it would be largely self funding against today’s budget. The only painful part of it as currently stated would be those at or near poverty level contributing another 5% from their paychecks.

The more I look at this the better I like it.

http://www.usnews.com/money/retirement/articles/2010/05/10/the-10-biggest-sources-of-retirement-income.html?PageNr=1 10 biggest sources of retirement income

http://www.huffingtonpost.com/dan-solin/real-change-outlaw-401k-p_b_154768.html Why 401K plans aren’t the best option.

http://edlabor.house.gov/testimony/2008-10-07-TeresaGhilarducci.pdf The actual plan being discussed.

http://www.sharedprosperity.org/bp204.html more about changing retirement plans.

any time now...

n/t

Once you retire?

Right now, my hubby's 401k contributions come out before tax, but anything we invest in our Roth IRAs is taxed before contribution. The way I understand it, once he retires, what is withdrawn from the 401k is taxed as income. What is withdrawn from the Roth IRAs is not since we paid taxes on the original contributions. I may be wrong on this, but that is what I remember my accountant telling us.

So if the contributions to the 401k are no long tax exempt, does that mean that the withdrawals will be?

As for the proposed plan, I don't have an opinion. At the rate things are going, hubby will not be able to retire so we'll never access those funds anyway.

discussion and "what if" as part of congress' ongoing research into all sorts of things.

I do agree with you, this sounds interesting. But I'm sure other people will have similar questions.

Thanks for posting this AND especially for debunking to soon to be common disinformation.

Denny Rehberg (R-desperate)

great deal. But only 38% of employees currently have 401k accounts and only a very small fraction of them have any matching contribution. Almost all 401k holders are at or near $100k or more.

The goal of any change in retirement planning should be to increase the number or people with real livable retirement income without breaking the government's bank. If implemented as-read this plan would do that. There are still issues to work out, like how to get the lowest income earners into the plan without making them homeless, how to handle the tax implications of contributions and payments as well as anything else that comes up in debate.

Like I said, it's just research at this point.

Pensions.....becoming extinct these days.

People who work for corporations should receive ownership in the form of stocks and options. Every employee should get even a percentage of a share with each paycheck. They are the ones who make any corporation successful, so THEY should be rewarded. The current corrupt system where a CEO makes 400-1000 times the salary of an average worker is not just inequitable, it's insane. It should also be a criminal offense. CEOs are obviously not geniuses or all knowing gods which conservatives say they are. Look at every hearing where CEOs testify. They either say they have no idea what was going on in their company (Enron) or they blame everyone but themselves when they cause a disaster (BP, Halliburton & Transocean).

How can people be paid so much when they don't have a clue what is going on in their companies and they have no responsibility or personal liability when they cause great harm to the environment, defraud people or even kill people?

Evil evil socialism! Where those who provide the goods own the means of production. Like CostCo.

"Hi, I'm AnArmyVeteran and I'm a socialist." I need to keep repeating that so I'll remember what to say at the next Socialists Anonymous meeting. :)

Is so it looks like a massive increase in SS tax under another name.

We aren't rasing SS contribution. This is a new contribution called a GRA.

It is mandated by federal govt (like SS),
administered by SS administration (like SS),
will be taken directly from your check no matter how poor your are (like SS),
will pay a guaranteed return (like SS),
but no it isn't a rasie in SS tax rate it is a GRA.

Essentially instead of 6.2% social security tax paid by employer it is 6.2% social security + 5% GRA = 11.2% total payroll tax (well plus another 1.45% for medicare).
Worse is that it looks like employer contributes nothing so rather than current 50/50 split with employer/employee it is more like 11.2% paid by employee & traditional 6.2% paid by employer. Shifting burden more 65/35 onto employee.

All that for a "whole" 3% return. Really? Hell you can invest in low risk bond fund (combination of govt treasuries & investment grade corp debt) and earn twice that with very little risk.

Second removing tax break for 401K is simply raising taxes under another name.
Will they also remove the tax breaks for IRAs?
Remove the tax free withdrawals on Roth IRA?
If not I see most employers simply ending 401K and paying employees more (or just keeping the money).
Why put money into 401K without any tax break when you can get paid 5% more and put same money into IRA?

purely research.

However, if your current retirement savings plans have a low risk portion, you could take that portion and re-assign it to higher return assets because the GRA would replace that for you.

I assume it would be a required contribution otherwise why bother. As I said, it's just speculation at this point and I did note the hardship it would place, as stated, on low income earners.

The three things about this that are attractive are: it is guaranteed, it is self funding against today's budget, it negates the uncertainty of the market and it would cover more people making old age support from other sources (medicaid, etc) less.

There are, like you said, areas of concern in the as-stated plan to be worked out in debate should it ever get that far.

Hell you could simply buy a 30 year treasury bond right and pull in a guaranteed 4.33%. Plus that is low because T-bonds are at historical low right now. The average treasury mutual fund has returned 5.6% over last decade. I mean as far as risk goes that is pretty much a no brainer.

My cash/treasury money is entrusted with Vanguard
http://performance.morningstar.com/fund/performance-return.action?symbol=VFITX&country=USA

Annualized return over last 15 years is 6.58% nearly double this "GRA" with no more risk.


This is a 5% tax which will hurt the poor and lower middle income, is forced, will provide a negligible return, and will be another stealth tax (401K no longer deductible = effective taxes going up).

Can't wait.

go with the funds. Still at the as-stated rates of investment and return a worker will be guaranteed an income equal to 70% of highest earned for the rest of his/her life. No concerns about the market and backed by the federal government.

I'm glad to hear that your retirement is well in hand. If such a plan as-stated did come into being I suspect that nothing would change for you. Vangard would simply shift your low income bonds to higher income investments. Those who are not as fortunate as yourself would have a much better retirement.

Like I said, it's just a goddamn study and starting place.

The fund is a treasury bond fund. They are required to invest in medium length govt securities.

I simply offered that as an example as why a 3% return is horrible. The vanguard fund does nothing but buy govt debt and pass the return on to the investor.

hose who are not as fortunate as yourself would have a much better retirement.
No they won't. They aren't being given anything except being forced to put 5% of their income into a horrible savings plan. That is all it is the savers money (forced by govt) into a horribly returning funds.

You could achieve the exact same thing TODAY by taking 5% of your pay put it into an Roth IRA and invest 100% of it in the a treasury bond fund (Vanguard fund was simply an example).

Take typical American with $40,000 salary.

GRA 5% forced retirement plan yielding 3% = 2,000 annually taken from payroll deductions.
Value after 30 years: $102,148.

GRA 5% forced retirement plan yielding 3% = 2,000 annually taken from payroll deductions (plus govt contributes "bonus" $600)
Value after 30 years: $131,957.

Personal savings of 5% into IRA plan yielding 6.5% (average for Treasury funds) = 2,000 annually contributed to IRA
Value after 30 years: $193,007.

The advantage of Rorth IRA unlike GRA is it is tax-free for life.

The GRA is nothing magic. It is simply forcing you to save 5% of your pay. The downside is the return is horrible, utterly off the charts horrible. You can do better for yourself right now.

"No they won't. They aren't being given anything except being forced to put 5% of their income into a horrible savings plan. That is all it is the savers money (forced by govt) into a horribly returning funds."

As it is now almost 25% of American retirees live on cat food or near to it.

It's nice to have the kind of nest egg you do (me too for that matter) but the fact is that an awful lot of Americans don't. Then people like you and me get to help them out. Take my next door neighbor who turned 90 last week. She lives on SS and food stamps. I managed to get her a $25,000 grant to refurbish her home so it wouldn't be condemned. You and I pay for those food stamps and the grant. Multiply that by a couple million or so.

The fact that this study was based on a worst case scenario and it still achieves a livable income of 70% of earned income is not laughable or horrible. It's survival for nearly 25% of people who worked their whole life and didn't do what you and I have.

Why base it on such low returns? Because that's the way studies are done.

They are paying for it each week by having their paycheck reduced by 5% hundreds of dollars a paycheck.

The govt isn't giving anyone anything that is why it is budget neutral.
The poorest of poor having another 5% taken from their paychecks for "their own good" to force them to save more (when they can barely make ends meet).

If people had an extra 5% money they could simply save 5% of their money and have twice as much at retirement.

I understand your point I just think it is a poorly designed system. Poor people aren't poor because they don't want to save. Poor people are poor because most of them don't have sufficient income TO SAVE. Forcing them to save 5% doesn't change that equation.

they did a good job on the 401k too..

talks about taking something important........ya know like my pottery collection or my husband. They will have to pry my cold dead hands off my pottery, the husband they can have.

"seize". come on.


Personally, I'm stuck with a 401k. I would trade my 401k in a minute for a secure retirement planned backed the government.

If the government realloacted 401k funds to a large pension pool that everyone can securely retire from, what is not to like?

As for an immediate fix, the same testimony covered exactly what you said you'd like. Suggest you read the PDF at the link. It's only a few pages long--a bare skeleton of what a final bill would look like.