17 November 2008

Gimme yer Dough

“Gimme yer dough.” That’s a line I recall from a comedy routine Bill Cosby used to do. Congress, not to be outdone by a respected comic, is thinking along the same lines – at least some of them are.

According to a Wall Street Journal editorial (November 6, 2008, subscription required), Representatives George Miller (D) CA and Jim McDermott (D) WA, think that 401(k)s “are a big failure” and want to replace these private retirement fund options with something akin to what the Social Security Administration now pays to those of us who have made it to age 65 alive. With the Social Security facing a looming funding crisis it comes as no surprise that Miller, McDermott, et al, are interested in finding a new source of funding other than raising taxes. There’s a plausible reason why they want to help out 401(k) owners.

Social Security is a pay-as-you-go system. What comes in almost immediately goes out as payments to Social Security beneficiaries. Never mind what you may have heard about the “Social Security Trust Fund;” it’s all accounting hocus-pocus. There is no cash account; the money is spent almost as soon as it is received. If Miller and McDermott get their way the assets from all of those 401(k) accounts would become available to Congress to spend but payments of some kind to the account owners wouldn’t be made for years or decades into the future. It’s a neat way of putting off the looming Social Security funding crisis for a decade or two. How much cash is in all of those 401(k) accounts? Well, Wharton school puts the 2006 value at something like $2.5 trillion. Of course, in the past few months stock values have dropped around 40%, but just roughing it out there is currently around $1.5 trillion in 401(k) accounts.

Of course, there are some problems with Congress getting its grubby hands on 401(k) accounts. First, there probably isn’t a constitutional way of simply taking them over so it becomes a matter of convincing 401(k) owners that the federal government can do a better job of managing their assets. That’s a tall order, given the long-term rate of return on payments made to the Social Security system. Second, all those 401(k) assets aren’t cash; most holdings are stocks, bonds and money market accounts. Liquidating all those holdings would make current financial market disruptions look like a tiny bit of bother.

No. It appears to me that the real motivation is that Congress would be able to take in a large chunk of cash without having to raise taxes or force the US Treasury into borrowing more. All of this would be done under the promise of making retirement funds more secure. Yeah, right. Remember Ronald Reagan’s most feared words: “I’m from the government and I’m here to help.”

UPDATE: In a letter to the editor of the Wall Street Journal on 18 November 2008, Rep. George Miller denies he has plans to end 401(k)s and replace them with some government-run pension system. Instead, he writes, he is interested in more complete disclosure of the details and costs of 401(k) accounts and removing the unfair tax burden on seniors who may be forced into begin taking withdrawals from their retirement accounts because they have attained a statutory age.

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