If you currently save in an employee-sponsored retirement plan, how would you feel if you stopped getting a tax break on your contributions? What if your employer stopped matching because they lost their tax break to do so? On top of that, what if you were forced to contribute 5% of your pay into government bonds regardless of age?
I don’t know about you, but the only real reason I do contribute to a 401(k) is because of the tax benefits. Otherwise, there would be no incentive to save in an account that has limited investment choices and an annual cap on what I can add to it each year. If I wanted to invest more money, have unlimited investment options, and be unable to deduct my contributions, I’d just stick to a brokerage account. The only thing I’d lose is the tax-deferral, and from what I’ve read, that may be gone too. They say we’re struggling as a nation to save money, yet the brilliant people in Washington are thinking about eliminating one of the few benefits to encourage saving.
Basics of the Plan
The biggest concern with this idea is the elimination of the tax benefits. They want to make it so your contributions are taxable. From the sketchy details I’ve seen so far, it looks like the tax deduction on contributions is gone, and possibly even the deferment of taxes on earnings. From the article:
The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.
To compensate for removing the tax breaks, they suggest giving people an inflation adjusted $600 subsidy. Gee, thanks!
In addition to the elimination of tax breaks, the plan calls to make contributions mandatory. Now, I’m all for encouraging people to save money, but making 5% mandatory doesn’t sit well. We already have a mandatory retirement contribution that we all make, and it’s called Social Security. How about they fix that before dictating that people have to contribute another 5%.
On top of the mandatory 5% contribution, the best part is that the 5% would have to go into government bonds. From the article:
The money in turn would be invested in special government bonds that would pay 3% a year, adjusted for inflation.
What’s so “special” about these bonds? The fact that they don’t even keep pace with inflation? Hey, sign me up!
This Would be Administered by Social Security
I wish I could make this stuff up. But since the government wants to put their hand in our private retirement savings, make contributions mandatory, and invest them in government bonds that don’t even keep up with inflation, they want the Social Security Administration to manage it. Yep, you know, the program that’s in trouble and politicians have been talking about reforming for the past few decades. Obviously, they are the perfect candidate for the job.
What I don’t get is why you need to change the way 401(k) plans work just to give Social Security the option of managing a portion of people’s money. We already pay into the Social Security system, so let’s address how that works before going in and sticking your hands in one of the only viable private investment options out there.
Also, who says that this won’t run just like any other government program where your money doesn’t really go into an account, but it instead goes into some magical trust fund that’s nothing more than a line item on a balance sheet. The government will gladly use your money for whatever wasteful purpose it wants, and only keep track of what they owe you, only to find out in 30 years they don’t have enough money to pay everyone back, and need to print even more money.
Government Bonds and Annuities
The best part of this plan (notice the sarcasm) is that everyone would be forced to lend 5% of their income to the government. Yes, everyone who earns a paycheck would be required to put that money into government bonds, which is just a way to lend them money. No wonder politicians are pushing for this idea. It isn’t because they want to force people to save more, or protect their retirement investment. No, it’s because it would instantly give the government billions of dollars every year.
Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York.
When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan.
Congress should let workers trade in their 401(k) assets for a guaranteed retirement account? Maybe if it is an option, that would be acceptable. Obviously, some people want security of their money, so I say, make that an option. But in no way should that be forced upon everyone.
To make matters worse, they want to pay out your money in the form of an annuity. Hey, we forced you to save, we didn’t pay you hardly anything in interest, and now that you’re retired, we’re going to hold onto your money for another 30 years while we collect more interest and give you a fixed monthly payment. One of the other benefits of a 401(k) is the flexibility of distributions, and they want to remove this aspect (at least on the mandatory funds). Nobody knows what their future holds, their health, or their retirement ambitions, but to take away the option of letting someone withdraw their money as they see fit after saving for years is just horrible.
What Do You Think?
I’m surprised I just heard of this, but I immediately felt my blood pressure rise after reading it. I can see why some of this looks like a good idea on the surface, but trying to address it with the changes that are being proposed seem almost criminal. But that’s just me, what about you? Good idea? Bad idea?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.