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

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.

Related Posts:

• Tax Alert: Fate of 401(k) when relocating.
• This Woman is Crazy!
• Tax Time: Last Minute List of Overlooked Deductions.
• Tax Time: Kiplinger’s “Do It Yourself Pay Raise” (Video).
• Are You Prepared to Pay $3,598 More in Income Tax for 2012?

This Woman is Crazy!

“Economist Teresa Ghilarducci argues that we needn’t be chained to our desks forever.”

This is a my reaction to the 5 question mini-interview by Pat Regnier with Ms. Ghilarducci in this month’s Money Magazine. The folks at Money Magazine have one of these mini-interviews every month, and they typically focus on mutual fund managers and financial gurus. I will say this for them – they are always an interesting read. But this month, I almost fell out of my chair when I read this one.

“(Money Magazine) – Conventional wisdom says that since Americans are living longer, we should work longer too – and that 401(k)s are the best tool for funding whatever retirement we can hope to afford.”

This is probably true. We could argue whether a 401(k), IRA or Roth IRA are better, but the idea is the same regardless of the vehicle used.

“But Teresa Ghilarducci isn’t one for conventional wisdom. In her upcoming book, “When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them,” the New School University economist argues that a rich nation ought to be able to ensure a secure old age. And she has a radical proposal for making that happen.”

Whoa, this sounds promising. We don’t have to work forever AND we can have the safety of a pension again!

“(MM): One idea for fixing Social Security is to raise the retirement age, since life spans have increased. You don’t agree.

(TG): No. Just because we are living longer doesn’t mean we’re living healthier. …We may be raising the retirement age presuming people can keep or find suitable jobs when in fact that won’t be true. “

She makes a good point here. Many assumptions about retirement length and age treat health and quality of life as remaining constant and relatively good.

“(MM): Your book argues for a new retirement system that gets rid of the 401(k) tax break. Can you explain?

(TG): The tax breaks for 401(k)s and IRAs are worth $50 billion a year. What are we getting for that? People aren’t saving any more because of them; those who use 401(k)s and IRAs are moving money they’d already be saving from taxed to nontaxable accounts. “

We’ve all heard stories about how people never get around to saving for retirement and make many mistakes when they do, but I’m not sure what the part about them moving money from taxed to nontaxable accounts is about. It sounds like she thinks it’s bad that people aren’t paying taxes on their retirement savings!

She goes on to say….

“The 401(k) doesn’t even make top-paid people save consistently. The only answer, and this is after 25 years of looking at it, is to make people save: a mandatory, universal savings plan on top of Social Security.”

I’m not sure how this is the only answer to the problem of people not saving for retirement. In fact, many employers have taken steps to solve this problem already – such as “forced” enrollment into the company 401(k) with the money going into a life cycle fund. The major criticism with this approach seems to be only that it isn’t enough.

“(MM): But the 401(k) is kind of a sacred cow.

(TG): Whatever contributions you’ve made to your 401(k) still won’t be taxed, but most people will have to contribute 5% of salary to a public “guaranteed retirement account.” Only that amount will be pretax, and the government will contribute $600 a year. For those in top brackets, income tax will go up – but so will their retirement security because even if you’re tempted to stop saving, the government is saying, “You can’t.”"

This is where she really goes off the cliff. Maybe I’m way off base here (I’m sure comments will let me know), but her idyllic “guaranteed retirement account” sounds an awful lot like what the Social Security program was meant to be when it started back in 1935!

So, in short, since the government made such a mess of their forced retirement savings program over the past 73 years we need to create another version ON TOP OF THE ONE THAT IS HAVING PROBLEMS NOW?! And we have to pay a portion of everyone’s $600 “government” contribution.

No thanks.

.

Related Posts:

• George Miller, Teresa Ghilarducci and the End of Your 401k.
• Spring Cleaning My Finances and Looking Ahead.
• Are Retiring Boomers “The 401(k) generation”?
• How to Save for Retirement When Your 401(k) Plan Sucks.
• Generation Y slacking on Savings?