Monday, December 8, 2008

George Miller, Teresa Ghilarducci and the End of Your 401k.

George Miller, Teresa Ghilarducci and the End of Your 401k.
Posted on | December 8, 2008 |



A while back I posted my reaction to a Money Magazine interview with Economist Teresa Ghilarducci. The gist of the interview (and why I said she was crazy) was her proposal to “fix” the problems with social security and retirement planning in the United States. It seems she just won’t go away…

Teresa Ghilarducci’s retirement plan.
According to Workforce Management:

Under Ghilarducci’s plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3 percent a year, adjusted for inflation.

The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.


Teresa Ghilarducci
This idea has really gotten legs since the stock market has essentially set the way back machine for 2003, thus erasing the retirement hopes of millions of Americans, if not postponing those hopes indefinitely. But the fundamental problem here is not the 401(k) plan as a retirement vehicle or the tax breaks it bestows. The fundamental problem is that private accounts like 401(k)s and IRAs have replaced traditional pension plans and there is an entire generation of workers (i.e. the baby boomers) who have received little to no education on how to properly use them.

In her testimony to Congress, Ms. Ghilarducci stated:

Short-term I propose . . . that the Congress allow workers to swap out their 401(k) assets, perhaps at August levels, for a guaranteed retirement account–just a one-time swap. . . .
How would this work? You go back to your districts and meet up with a 55-year-old who had $50,000 in his account last month and now has $40,000 in the account. He can swap out that $50,000, valued in August, for that guarantee of what would become, if he retires at 62, a $500 a month addition to Social Security

A recent article in the WSJ on the Ghilarducci plan and her testimony makes the point that a 55-year-old who lost 20% of his portfolio because of the market decline since August had too much invested in stock for his risk tolerance and stage in life. But this makes my point: too few people understand even the basics needed to manage their retirement plan.

The root of the problem Ghilarducci has with the effectiveness of the 401(k) plan as a retirement vehicle is the lack of education and financial literacy.

But I don’t think that’s the full story.

Ms. Ghilarducci is clearly of the opinion that the government will do a better job of management worker’s retirement funds than the workers - despite the failure to do so with the Social Security system, which was originally intended to solve this problem. History has shown that government is NOT better at this.

George Miller, Jim McDermott and your tax break.

George Miller, D-Calif.
Enter George Miller, D-Calif., House Education and Labor Committee Chairman and Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support. These guys think you shouldn’t get a tax deduction for your 401(k) contributions. They would like to see Ghilarducci’s plan implemented and the tax breaks for 401(k) and IRA plans eliminated.

From Investment News :

She [Ghilarducci] has been in contact with Mr. Miller and Mr. McDermott about her plan, and they are interested in pursuing it, she said.

“This [plan] certainly is intriguing,” said Mike DeCesare, press secretary for Mr. McDermott.

“That is part of the discussion,” he said.

While Mr. Miller stopped short of calling for Ms. Ghilarducci’s plan at the hearing last week, he was clearly against continuing tax breaks as they currently exist.

The end result of this would be you, the worker, get 2 choices to make regarding your retirement planning:

1). Forfeit your private retirement account (401(k) and IRA) and the chance to make, on average, 10% return on your money per year and receive a government managed plan in which you receive only 3% return, adjusted for inflation.

or

2). Keep your 401(k) and IRA plans, be effectively taxed twice (once on your contributions, and again on your withdrawals) and still be forced to contribute 5% of your income a year to the government managed account.

The result of implementing this plan could also lead to even more money being taken out of market en mass - decapitalization of the market - resulting in more businesses going out of business and more economic woe. But won’t you feel safe and secure when you get 3% return on your money.

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