Our central planing commission at work, 401k department

In school many of us learned that the main difference between capitalism and communism was that a capitalist economy was based on individual rights and a free market while a communist economy was controlled by a central planing committee backed up by law.

In recent weeks we've seen some rather drastic stock market action, and most of us who are stock market investors have seen our account values shrink. That's the downside of a free market system, but that isn't a reason to turn it over to the government.

As we look ahead with dread to the possibility of a House, Senate and White House controlled by Democrats, let's see what their central economic planning committee has in the works for the 401k. See Retirement Accounts Have Lost $2 Trillion So Far, excerpt:

Some experts argue that the hefty tax subsidies that Congress has put in place in recent decades for 401(k) and other worker-contribution accounts have made people's retirement income less secure by shifting risks, decisions and costs from employers to people who often know little about investing.

"They are fatally flawed," Teresa Ghilarducci, an economist at the New School for Social Research, said of the tax-advantaged plans. "They're too risky, and it's not good policy to have workers run their own retirement plan. They want government help."

Did you get those last two sentences? The only time they can tell us this with a straight face is during a market downturn: We're too dumb to handle our own money, and we want the government to do it for us. But of course.

Aside: I believe AP uses the word "subsidy" to mean the amount of income taxes that would have been collected by the government had the income not qualified for the 401k exemption. Put another way and expanding it just a bit, a worker gets a gross income, and the government collects a tax from it. Subtract the tax from the income and the remainder, i.e., the worker's take home pay, is a "subsidy."

So just how would the government help us? Ms. Ghilarducci, is getting the attention of some Democrats. See House Democrats contemplate abolishing 401(k) tax breaks. Excerpt:

House Education and Labor Committee Chairman George Miller, D-Calif., and Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute. ...

Under Ms. 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% 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% a year, adjusted for inflation.

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

"I want to stop the federal subsidy of 401(k)s," Ms. Ghilarducci said in an interview. "401(k)s can continue to exist, but they won't have the benefit of the subsidy of the tax break."

Under that plan workers pay an additional 5% into Social Security, and that money would be given to the government to be spent as our Legislators and Senators see fit but with a promise to pay it back someday with 3% inflation adjusted interest.

Tax, spend, pay back with interest. Now there's a plan. Asking us to trust the government in light of the terrible job it's done with our money is really asking a lot.

"We're from the government, and we're here to help. Oh, and also to spread the wealth."

Comments

[Janie]

I'm scared to look at my 401K.

[Geo]

Janie, there are lots of people out there who weathered the bear market of the 70's, the oil bust, the real estate collapse, the bank and S&L failures, the stock market crash of '87, the bursting of the tech bubble in 2000, and this latest financial episode, and yet they lived to tell about it. Life ain't so bad. And even if Obama wins, it's not the end of the world.

P.S. They had to walk to school in the snow, too!

[Annie]

Geo...it IS the end of the world if Obama would approve such a plan. First of all, husbands and wives would not be able to inherit their spouses plan which they have planned around. Stay at home mothers will be eating out of garbage cans if their spouse dies.

[Geo]

Annie, that's a scenario I had not considered. Thanks for enlightening us.