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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7 Responses to “George Miller, Teresa Ghilarducci and the End of Your 401k.”
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December 8th, 2008 @ 11:17 am
I agree, the main problem of the effectiveness of the 401K comes from a lack of investor education and an understanding of how to make these work.
Mike Bonacorsi, author
Retirement Readiness
December 9th, 2008 @ 5:21 am
I think you’re right when you say she’s crazy. The more times money gets trasfered around from one government agency to another the less there is when it reaches its final destination.
She also wants people who’ve lost huge sums in the market to get their money back from the government. That sounds great exept where does the government get its money from? Taxes! The government would either have to raise taxes or go further into debt. I don’t think I like either of those options.
December 12th, 2008 @ 5:08 pm
You are so completely right. I find it particularly frustrating to be on the younger half of this mess. The most recent estimate I found for when I will be able to draw from social security was age 75. Yet, that extra 6.5% (or 13% if I include my employers contribution) would really help my own 401K. All these fixes they keep coming up with is just delaying the problem and usually makes it worse.
January 22nd, 2009 @ 7:09 pm
[...] into the SS pool. Damn I hate to be a cynic and skeptic but I have seen how they do this shit. George Miller, Teresa Ghilarducci and the End of Your 401k. | Simple Debt-Free Finance [...]
January 29th, 2009 @ 8:53 am
[...] the worker with a 3% return on his money, instead of the market return of a 401(k) plan. You can read more on why this plan should never see the light of day here. addthis_url = ‘http%3A%2F%2Fsimpledebtfreefinance.com%2Fhow-not-to-fix-the-401k%2F’; addthis_title [...]
March 2nd, 2009 @ 4:00 pm
[...] fact, much of the article seems geared toward pushing the Ghilarducci plan that I wrote about here. In that plan, workers would forfeit the opportunity to earn higher returns on their retirement [...]
April 30th, 2009 @ 7:22 am
[...] exists that we will not only see increased tax rates, but also an increase of new taxes. Already, politicians have targeted the 401(k) plan. One of their criticism of the plan is the money the Government misses out on while workers funds [...]