October 23, 2008
More on that Democratic plan to kill 401(k)'s
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 This
1. This is absolutely the stupidest thing that I have yet heard from the Dems. There is going to be a revolt if they think they can get away with this. There has never been a government program that has been efficient. The demise of Social Security is a NEAR-TERM problem as it is already going broke and Medicare will go broke sooner than that. We are not going to be a socialist country, we are becoming Marxists. We already face a lower standard of living if BHO gets elected.
2. I guess the 401Ks are too good an idea. No wonder they must be eliminated. We'll see about THAT! No more underperforming lame liberal ideas. The current banking crisis was the result of liberals pressing banks to make bad loans and enabling it with Fannie. Please, NO MORE liberal "help". We were much better off without it!
A while back, I mined the entire history of the S&P 500 to identify the worst rates of return ever recorded for investments of any length of time ranging from one month to 130 years long (data for the S&P 500 and its precursor indices and stocks go back to January 1871).
Just 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.
Geezz ... had not heard about that nutty idea. So, what happens to existing 401k accounts? We need to hand them over to the United Socialists of America?
This 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.
5. TRY IT OUT!
Americans for Tax Reform Tax Calculator
How This Calculator Works
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).
Below 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
TO: any Politician reading this:
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.
Weren't the dems against private retirement savings accounts.. Oh Yeh!
They won't be happy until they take all of your cash!
What's next IRA's for McDermott?
8. So funny that dems were SO against the idea of having ACTUAL accounts in SS with one's own money in it. WHY HADN'T IT OCCURRED TO THEM THAT THEIR ss WAS LESS SAFE IN THE HANDS OF POLITICIANS, WHO'D ALREADY STOLEN IT AND SPENT ALL THAT MONEY?? Our 401ks have real money in them with our actual names on them. If these people want to take them so they can spend THAT too, they have another thing coming.
I agree that this is a stupid, idiotic, ludicrous (...) idea. McDimwit should be focusing on going through the budget and trimming programs no longer needed, like Obama has stated as one of his actions he wants to take immediately.
Tying McDimwit's hairbrain ideas to Obama, however, is like tying Bachmann (congresswomen from MN) to McCain. Both parties have there stupid congressmen and women.
Check out Investor's Business Daily's editorial today on this Democratic Party idea. They point out that Argenitina's nationalizing of the nation's savings plans has precipitously dropped the stock market value. The same would happen here as stocks in companies are converted to Treasury Bills. Investment money would dry up to expand companies and saver's would have little real return on savings and thus would save the minimum in such government run plans. This at a time when our national savings rate is too low anyway.
McDermott 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.
This is just the beginning of the socialist hell into which Barack Hussein Obama wants to lead us.
Wake up people, wake up!
This is what politicians do... they react by passing legislation full of so-called "solutions" that have not been well thought out, and are usually found to be a burdensome disaster years later. (Exhibit A - unrestrained Fannie Mae/Freddie Mac, exempt even from Sarbanes Oxley.)
After they brag to their constituents that they fixed the problem and get re-elected, 10 years later they blame the Republicans.
Yeah, if Democrats get 60 seats in the Senate, lord help us. Horrible ideas like this will be only the beginning.
And 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.
I don't understand why any of this is a big surprise. 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. And the list goes on and on. This 401(k) deal is just the next small step into the total control of all aspects of your life. And there is no end in sight.
With 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.
15. G Jiggy
"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
16. Has anyone given any thought to what kind of effect such a plan would have on the market? What would happen if all of that money stopped providing venture capital to the market. Industry would stop growing. In conjunction with higher taxes on the rich that will effectively mean the end of US industry.
These attacks on the Guaranteed Retirement Account plan, authored by Dr. Teresa Ghilarducci, are predictable but inherently flawed when measured against historical data, current reality and overall common sense.
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.
For what it's worth (and I assume that will be "nothing"), I just wrote to McDermott telling him what an incredibly stupid idea this is.
Sadly, we can't seem to get rid of the idiot. I expect Steve Beren will get around 16% of the vote *again*.
"and there are many decades where investors lost significant value."
I don't believe this. Many decades?
Christian Dorsey said "...there are many decades where investors lost significant value."
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.
A person with a 401k doesn't have to put the money into stocks! They can buy money funds.
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!
23. "Given that the typical middle class American now relies on 401(k)'s and similar investment vehicles for retirement saving,... Give me a break!. Do you know how much people have lost in the last 60 days, especially the baby boomers? Wall Street has lost control of your money. You pay the price. How many people would be able to retire today if they had their money in safe government concerns? Secondly, 401k funds have never been taxed. Only the privileged few who can afford to save get this benefit. The Republican financial disaster needs to be paid for in term of people not loosing their homes. Instead of bailing out all those banks, why not help the people who suffer because of their actions. How do we pay for this? Our politicians are already looking at the incredible wealth in tax free savings. This money should be used to pay for all these programs. If not, how will we ever get our health care, etc. Lets take an unselfish look at innovative ideas...Remember, wealth takes tremendous responsibility. Why not let experts direct retirement savings?
Re: Mike Comment 23 "Why not let experts direct retirement savings?"
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.
25. Regarding your comment "BECAUSE IT IS MY MONEY AND I WOULD LIKE TO DETERMINE THE LEVEL OF RISK I AM WILLING TO TAKE FOR MYSELF.", I wonder how many people are sitting at their kitchen table now trying to figure out how the will make ends meet because of the Wall Street destruction of their IRA. Additionally, I wonder how many tax payers dollars will be spent on taking care of those who have lost most of their future funds?
In reference to the money you saved for 33 years, not everyone had the opportunity to do that. Second, that 33 year old money is tax free as it sits at risk in an unsupervised account. As Biden said, it's only patriotic to pay our taxes for the benefit of the country. KE64, times have changed. Try and be a bit creative, not hostile.
No Mike, times have not changed. The story of the ant and the grasshopper is very ancient and still true today. Some, the ants, save for the future and build with their time rather than waste it. The grasshopper does not and then chastises the ant because the ant has more than the grasshopper.
If 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.
25--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.
28. If you don't think times have changed, poll individual groups 15/20, 20/30, 30/40. age groups and ask who should have control of excessive funds. To your point, money management is no longer taught in the schools. History and government is a side subject. Equality is. Sharing is. Entitlement is. Opportunity must be shared. We need to think in the global present, not the domestic past. There are too many 'Joe the Plumber' mentality types out there. The proof in my statement is seen in the overwhelming support of the Democratic Party, both state wide and nationally. In summary, the ant and grasshopper need to adapt...
Mike 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.
32. A good plan when the monies can be pulled out is transfer, paying normaltaxes, out to a savings account in a Swiss account.