James Pethokoukis at U.S. News & World Report digs deeper on that talk - including our own Jim McDermott - of taking a sledge hammer to how most Americans now save for retirement.
Pehtokoukis lays out a host of reasons why this is a wretched idea. A couple commenters at the original post this morning objected to my tying of McDermott to the proposal. Too bad. McDermott may not be specifically endorsing the plan as presented to Congress, but he and Rep. George Miller are leading a Democratic effort to toss aside 401(k)'s in favor of a government-controlled saving plan. If it is anything like the plan discussed, it amounts to mandatory contributions to a retirement system guaranteed to under-perform other investment options.
Economics know-nothings are happy to point to current affairs with the stock market to claim equity markets are a bad idea. The truth is that since 1928, equity markets have crushed Treasury bonds in compounded investment value. And yes, that factors in substantial down periods in market history, including the Great Depression.
Given that the typical middle class American now relies on 401(k)'s and similar investment vehicles for retirement saving, ditching such tax-favored options for what McDermott and Miller are musing about would be the worst kick to the groin of the average American in history. It would single-handly guarantee a lower standard of living in retirement than that which is currently possible...and that's not even considering long-term problems with Social Security.
Posted by Eric Earling at October 23, 2008 07:35 PM | Email ThisJust for fun, I asked the question: "If an investor put money into the S&P 500 on a regular basis, earning the worst ever recorded rate of return for the amount of time it was invested, until some point in the future when all the investments were cashed in, how would the value of those investments compare to the investment returns from U.S. Treasury bonds?"
The results of that exercise for a one to fifty year period of time are here. Please bear in mind that in order to create that worst case scenario, I had to graft together several of the absolute worst periods for investors from the entire span of stock market history - no one living or dead has actually ever seen investment returns from the S&P 500 this bad.
For those that opt to not click through to the link, the results are that even the very worst of inflation-adjusted returns for the S&P 500 will outperform U.S. Treasury bonds over the typical lifespan of one's working career and retirement.
On a side note, this Democratic party plan to nationalize 401(k) accounts is an acknowledgment that Social Security is failing as it's currently set up. The proposed funding mechanism is clearly intended only to provide the government with a captive source for "cheap" debt financing.
We know this is the case because if those special U.S. Treasury bonds were really desirable, they'd be flying off the shelves, especially in today's economic climate. No one is biting - they just don't offer a good enough return for the risk they represent. They don't and never will.
Posted by: Ironman on October 23, 2008 08:25 PMThis would kill individuals and families who rely on 401ks to save for retirement, of course, but even at a macro level, it's a hugely bad idea. This country needs a higher savings rate and this kind of plan will make it even worse than it is.
Posted by: bananaland on October 23, 2008 09:01 PMAmericans for Tax Reform Tax Calculator
The ATR 2008 401(k) Calculator attempts to show how various changes to the tax structure will affect the underlying value of your 401(k). Since taxes are a cost drag on investments, raising or lowering key tax rates has the effect of raising or lowering the value of your nest egg--regardless of whether that nest egg is in a tax-deferred account or not. When the stock market goes up and down, so does your 401(k).Posted by: Ragnar Danneskjold on October 23, 2008 09:45 PMBelow are the inputs for each of the scenarios. The calculation's estimates were prepared by Rutledge Capital.
Current Law: When you input the value of your 401(k) today, implicit in that value are the effects of current tax law. These include a 15% capital gains rate, a 15% dividends rate, a 35% corporate income tax rate, and depreciation of capital equipment
Obama: The Obama tax plan assumes a 20% capital gains rate, a 20% dividends rate, a 35% corporate income tax rate, and depreciation of capital equipment
McCain: The McCain tax plan assumes a 7.5% capital gains rate, a 7.5% dividends rate, a 25% corporate income tax rate, and expensing of capital equipment
Hill Dems: The Hill Democrat tax plan assumes a 28% capital gains rate, a 39.6% dividends rate, a 35% corporate income tax rate, and depreciation of capital equipment
ATR: The ATR tax plan assumes a 0% capital gains rate, a 0% dividends rate, a 25% corporate income tax rate, and expensing of capital equipment
If you decide in your wisdom to screw with our 401(k)'s, the Rodney Riots will look like child's play.
Think it over.
Enough is enough with creeping ameri-socialism.
Posted by: jimmie-howya-doin on October 23, 2008 09:56 PMThey won't be happy until they take all of your cash!
What's next IRA's for McDermott?
Posted by: gs on October 23, 2008 09:59 PMTying McDimwit's hairbrain ideas to Obama, however, is like tying Bachmann (congresswomen from MN) to McCain. Both parties have there stupid congressmen and women.
Posted by: tc on October 24, 2008 07:22 AMMcDermott and Miller have ingeniously solved the problem of the retirement of the baby boomers. Consficate their savings and replace them with special T-Bill that can be reneged on at any time and pay such a wretchedly low return, that no one can afford to retire. Work until you die, the worker's paradise come to America.
Posted by: KW64 on October 24, 2008 07:28 AMWake up people, wake up!
Posted by: Kato on October 24, 2008 08:20 AMAfter they brag to their constituents that they fixed the problem and get re-elected, 10 years later they blame the Republicans.
Posted by: SeaRep on October 24, 2008 08:33 AMAnd when the house of cards comes crumbling down in the next 4 years (if Obama is elected), I guarantee you haven't heard the last of the "Bush economic policies" cabal.
Posted by: Palouse on October 24, 2008 09:26 AMWith an Obama administration you will be told how much of your money will go to others who don't make as much and other "spread-arounds". When you do retire you will be told what sort of "volunteering" you will be doing and which medical procedures you will have access to. You may not be worthy of some. Some may disappear as will what kind of radio content you will be listening.
As teachers indoctrinate another generation of our kids in the government madrassas, teaching them Obama songs and "social justice", you had best keep your head down when the brown shirts start marching. The only thing we are fighting over now is if you personally can be considered be "rich" or "deserving". It will make a difference and they are the ones who will decide.
Posted by: G Jiggy on October 24, 2008 09:45 AM"The fascist left is already telling us what kind of car we should be driving and which public transportation is best for us and how far we should live from work, what energy we should use, what food we should eat, what kind of oil we cook our french fries in, what wage we should be paid and what sort of light bulbs you can buy or sack to carry your groceries in"...
Has anyone forgotten how the facist libtards you people elected to King county power positions foisted off the 65-10 rule you?
Regarding light bulbs, how many of you read this bit of inane, tree hugging, root kissing drivel from the Seattle Times last year?
Now you're out of excuses - time to switch to CFL bulbs
Amazingly (ha! ha!) the Seattle Times didn't see fit to tell their subscribers that CFL bulbs have a myriad of problems that are more than mere nuisances...
Remember if Hussein the Inane wins the election, the IRS Will be Hiring
For one, it is incorrectly reported the GRA plan will provide only a 3% real rate of return. The 3% real is effectively a floor, not a ceiling, and represents the government's guarantee to the account holder. If real returns are more than 3%, the excess goes into a balancing fund, which will revert to retirees if returns continue to exceed the guaranteed rate.
Furthermore, that 3% real is not to be trivialized. If you invested in the S&P 500 in 1871 and held on to it until now, you would have done better than a 3% real annualized return. Yet, no one saving for retirement has a 130 + year investment horizon, and there are many decades where investors lost significant value.
As a 401(k) participant who entered the market near the end of a bull market, I expect to endure many bear market years before I retire. At least I may have time to recover. Those seeking to retire soon have to hope the market recovers quickly. They also have to worry about outliving their assets, which would not be a problem with GRAs.
The GRA plan endows government, with its infinite time horizon, with the risk. It provides a source for sound, guaranteed planning over the long-term and eliminates the severe retirement insecurity for current and soon-to-be retirees. When it comes to retirement, Americans deserve security, not a seat at a craps table.
How, exactly, would the goverment pay on these bonds at maturity? In the stock or bond markets, new products and innovation increase economic output, and so provide a return. In the case of the gov't, it produces nothing, so bonds (debts) incurred today cause a load of taxes tomorrow. The scheme is the equivalent of issuing every retiree a credit card.
Debt is not income. Investments are.
Posted by: bfr on October 24, 2008 11:56 AMSadly, we can't seem to get rid of the idiot. I expect Steve Beren will get around 16% of the vote *again*.
Posted by: Bryan Lovely on October 24, 2008 12:00 PM
I don't believe this. Many decades?
Actually, no, this is not true. Back in 2000, I recorded the returns of the S&P 500 going back to 1926. At that time, there was all of ONE (1) 10-year period that had a total annualized return below 0%. That was the 10-year period from 1929-1938. The average annualized (geometric) return was -0.63%.
That period included negative annual returns of the S&P of -7.93% in 1929, -23.91% in 1930, -41.72% in 1931, -8.99% in 1932, -1.48% in 1934, and -33.93% in 1937. However, interspersed with those terrible returns were positive years of 52.98%in 1933, 43.32% in 1935, 33.28% in 1936 and 30.04% in 1938.
Out of the 66 10-year periods covered by the data, there were a total of 5 ten-year periods that had an average annualized (geometric) return of less than 3%. I.E., 92.5% of these 10 year periods produced returns greater than 3%.
NOW, if you look at 20-year periods, there are NO periods with negative returns. The lowest 20-year average return was 3.13%.
Finally, if you look at post-1940 returns (i.e. after the great depression), the worst 10-year return was 1.2% (the period from 1965-1974)--the 1973-1974 stock market was the worst market since the great depression (-14.51% in 1973 and -26.03% in 1974). So even including the worst post-war market did not generate a negative 10-year return.
And as far as post-1940 20-year returns, the worst period had a 6.42% average return.
The market corrects itself and generates good returns over time. When it does not, it tends to be times when the Government screws things up such as the screw-ups that led to the great depression (Smoot-Hawley Tariff Act, tight money and increased tax rates) or the decline of 1973-74 (Nixon wage and price controls), or the latest market crash (Fannie-Mae, Freddie-Mac, Community Reinvestment Act).
Will the next administration learn from the past and do things that will help the economy and hence the stock market? Or will they learn the political lessons of the past (Roosevelt) and screw up the economy and screw up the stock market and blame it all on Bush? I am very concerned that an Obama Administration would do the latter.
They still get the tax free aspect if they want to reduce current income.
Anyone with a 401k can pull his money out of stocks and shift it to cash.
Some how this idea seems to get lost when people talk about "losing all this money".
Well, change your investments, ding dong!
BECAUSE IT IS MY MONEY AND I WOULD LIKE TO DETERMINE THE LEVEL OF RISK I AM WILLING TO TAKE FOR MYSELF.
"Our politicians are already looking at the incredible wealth in tax free savings. This money should be used to pay for all these programs."
NO! IT SHOULD BE USED TO PAY FOR MY RETIREMENT THAT I HAVE SAVED 33 YEARS FOR.
I think you need to revisit the prohibition against takings by the government in the constitution. Our founding fathers had a fondness for private property and were afraid of the kind of governments that would seize it.
Posted by: KW64 on October 24, 2008 07:49 PMIf society plunders the ants, all will become grasshoppers and the society will fall. Ants' savings provide the capital that build growing businesses and the possibility of success drives the intiative that creates wealth. Our government recognized almost 30 years ago that the US had too little in savings to finance its own growth and was relying on foreign capital. We thus created vehicles that encouraged savings. Government also could see that when the baby boomers retired, there would not be enough money to provide social security in amounts that would support them in retirement. Thus, prudently, they created encouragement for them to save to provide for their own retirement.
Look at the poverty (not to mention tyranny) of the societies that have plundered private savings. Did Soviet Russia provide well being for their people? Did Cuba? China only started growing when it adopted measures allowing some private property and investment.
It is your redistrubutionist ideas that are old and proven to fail not the free market capitalism of Adam Smith and the protection of individuals rights to private property that are out of date.
Posted by: KW64 on October 25, 2008 07:04 AM25--but the Ant & Grasshopper is no longer taught at schools. Emphasis is now on the Diversity of Insects and celebrating Same-Species Partnerships, not how to gather seeds with one's disclipline and sacrifice as our ancestors did. Precisely NOT the "share the wealth" push mentioned recently.
Times have NOT changed, only people's stupid, entitlement-oriented, lazy, socialistic or short-sighted choices in this land of continued opportunities. Fruits are on the tree--get off your keester and pick them.
No, I do NOT want to share my pie with you. Bake your own. I'LL choose to whom I give in charity. and i DO give very generously and very selectively to deserving, efficient charities.
Posted by: jimmie-howya-doin on October 25, 2008 08:00 AMHmmm mike, do you think Wall Street was alone in the destruction of IRAs, 401Ks, etc?
What part did race pimps of the party of the Seditious & Sleazy play in it all?
How much arm twisting was applied to financial institutions by the slick willie administration under the guise of attacking some sort of supposed descrimination?
What did Janet karaoke Reno have to say about the CRA?
Let's look at the comments Reno made to that collection of parasites called NATIONAL COMMUNITY REINVESTMENT COALITION and see if you can see the not so veiled threats...
Consider the following from Taki's magazine: The Diversity Recession, or How Affirmative Action Helped Cause the Housing Crisis
How many people in the MSM are as honest as this particular Democrat, Orson Scott Card? Would the Last Honest Reporter Please Turn On the Lights?
Posted by: juandos on October 25, 2008 10:43 AMHmmm mike, do you think Wall Street was alone in the destruction of IRAs, 401Ks, etc?
What part did race pimps of the party of the Seditious & Sleazy play in it all?
How much arm twisting was applied to financial institutions by the slick willie administration under the guise of attacking some sort of supposed descrimination?
What did Janet karaoke Reno have to say about the CRA?
Let's look at the comments Reno made to that collection of parasites called NATIONAL COMMUNITY REINVESTMENT COALITION and see if you can see the not so veiled threats...
Consider the following from Taki's magazine: The Diversity Recession, or How Affirmative Action Helped Cause the Housing Crisis
How many people in the MSM are as honest as this particular Democrat, Orson Scott Card? Would the Last Honest Reporter Please Turn On the Lights?
Not to worry folks Barney 'the raving House Queen' Frank has your concerns addressed... ROFLMAO!
Posted by: juandos on October 25, 2008 10:48 AMMike your polling data only suggests that those who do not have much in the way of savings will think it is nice to steal the savings of those who have some because they are near retirement and have been saving a long time. If 20 thugs approach me and vote to steal my wallet and I am the only one voting no, that is not democracy, it is merely theft.
The founding fathers considered precisely this problem with democratic government and thus protected minority groups from a tyranny of the majority by extending them certain basic rights. Freedom from takings was one of those rights. If you and others wish to tear up the agreement the constitution represents between our citizenry,and the Democratic Party actually takes over the people's private savings, expect massive Democratic seat losses in the 2010 elections.
Posted by: KW64 on October 25, 2008 05:47 PM