Is Your Retirement Plan at Risk?

A lot of media has focused this past week on President Obama's desire to limit tax-deferred retirement plans to no more than $3,000,000 in assets saying that was adequate to fund any normal person's retirement. President Obama's goal of course is to find some method to raise adequate money to continue the out of control spending that takes place in Washington and there is a huge pool of money sitting in retirement plans; a delectable treat for any politician. Will this happen though? Will the establishment in Washington think it's a good idea to raid people's retirement plans like the Cyprus government did people's bank accounts?

In prior articles, I've written about Teresa Ghilarduci and the New School of Economics; a highly progressive establishment teaching economics of a non-traditional nature. During the 2008-2009 debacle Ms. Ghilarduci testified before Congress that tax-advantaged retirement plans are no more than theft from the government and should be done away with in lieu of a government guaranteed retirement system. Her argument is fundamentally that people are too stupid to manage their own money and too subject to being manipulated by unscrupulous fund managers who have the audacity to charge for their services. Further, given this ineptitude on the part of individuals to provide for their own retirement, the government should provide that in a system akin to Social Security. One retirement plan for all! And yes, if that sounds familiar, that's the direction of the Affordable Health Care Act (Obamacare) - one medical plan for all.

Well the problem with the New Schools propositions which have now made their way to the White House is simply that it won't work. The claim that Social Security has been a wonderful program that has worked oh so well is a fantasy. The reason Social Security worked so well is that since its inception, it had a larger and larger pool of people paying in to a smaller number of retirees. As a demographic shift takes place over the next 20 to 30 years, the Ponzi scheme will collapse leaving U.S. taxpayers holding the bag - as always. The reason is simple; whereas Social Security calls for the incoming funds paid by taxpayers to be invested in "non-marketable securities with the full faith and credit of the United States" that means only government securities (debt) so special government bonds were created for Social Security that pay below market interest rates. Presently of the $17 trillion on U.S. Debt, around $5 trillion of that is owed to Social Security. So while the mathematics of Social Security has worked while the baby-boomers worked, the politicians spent the money and now that the baby-boomers are retiring, the cash is gone so either the Trust converts some of that $5 trillion into cash (hard to do since the U.S. government doesn't have the cash) or it raises taxes. Either way, to call the program a success is a misuse of the word "success".

Secondly, the thinking on the New School ignores basic human nature as so many of these well intended programs do. Many of the retirement plans that would cross that magic (and highly arbitrary) $3 million mark are plans owned by small and mid-size private companies. Guess what, when the owner isn't able to contribute any more, the plan will get shut down leaving the pain on lower and middle income workers. Furthermore, but in the same line of thinking, the New School ignores the political reality that an arbitrary $3 million will be lowered over time. Just like any "tax the rich" scheme, it never really hits the rich, that's not where the money is. The people that will ultimately pay for this are the people with between $100,000 and $1,000,000 in their retirement plans and that is NOT a huge amount of money with which to retire.

So the idea is a bust from the get go. The really good news is that you don't need to worry about it today. There is no way this will pass Congress and with a 2016 election only 3 years off, this idea is dead on arrival. But, you should be aware that the thinking of people like those in the New School of Economics is not dead and they will continue to push an agenda of utopian egalitarianism as long as they can, and as long as it doesn't apply to them!

at 12:45 AM
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