House Democrats Contemplate Abolishing 401(k) Tax Breaks

http://www.workforce.com/section/00/article/25/83/58.php

This could be an issue

House Democrats Contemplate Abolishing 401(k) Tax Breaks

Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, 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.

A plan by Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York, contains elements that are being considered. She testified last week before Miller’s Education and Labor Committee on her proposal.

At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months.

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.

“I want to stop the federal subsidy of 401(k)s,” 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 the current 401(k) system, investors are charged relatively high retail fees, Ghilarducci said.

“I want to spend our nation’s dollar for retirement security better. Everybody would now be covered” if the plan were adopted, Ghilarducci said.

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

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

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

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

Savings rate

“The savings rate isn’t going up for the investment of $80 billion,” he said. “We have to start to think about ... whether or not we want to continue to invest that $80 billion for a policy that’s not generating what we now say it should.”

“From where I sit that’s just crazy,” said John Belluardo, president of Stewardship Financial Services Inc. in Tarrytown, New York. “A lot of people contribute to their 401(k)s because of the match of the employer,” he said. Belluardo’s firm does not manage assets directly.

Higher-income employers provide matching funds to employee plans so that they can qualify for tax benefits for their own defined-contribution plans, he said.

“If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets,” Belluardo said.

“This is a battle between liberalism and conservatism,” said Christopher Van Slyke, a partner in the La Jolla, California, advisory firm Trovena, which manages $400 million. “People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny,” he said.

The Profit Sharing/401(k) Council of America in Chicago, which represents employers that sponsor defined-contribution plans, is “staunchly committed to keeping the employee benefit system in America voluntary,” said Ed Ferrigno, vice president in the Washington office.

“Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system,” he said.

No legislative proposals have been introduced and Congress is out of session until next year.

However, most political observers believe that Democrats are poised to gain seats in both the House and the Senate, so comments made by the mostly Democratic members who attended the hearing could be a harbinger of things to come.

Advice at issue

In addition to tax breaks for 401(k)s, the issue of allowing investment advisors to provide advice for 401(k) plans was also addressed at the hearing. Rep. Robert Andrews, D-New Jersey, was critical of Department of Labor proposals made in August that would allow advisors to give individual advice if the advice was generated using a computer model.

Andrews characterized the proposals as “loopholes” and said that investment advice should not be given by advisors who have a direct interest in the sale of financial products.

The Pension Protection Act of 2006 contains provisions making it easier for investment advisors to give individualized counseling to 401(k) holders.

“In retrospect that doesn’t seem like such a good idea to me,” Andrews said. “This is an issue I think we have to revisit. I frankly think that the compromise we struck in 2006 is not terribly workable or wise,” he said.

On Thursday, October 9, the Department of Labor hastily scheduled a public hearing on the issue in Washington for Tuesday, October 21.

The agency does not frequently hold public hearings on its proposals.

Filed by Sara Hansard of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

dude its democrats doing this, they are always right. sheesh get a grip, questioning them makes you racist.

Let's entrust the government with managing and dictating even more aspects of our lives!! I won't be surprised at all if this get's passed if Obama is elected and Dems pick up more House and Senate seats...fabulous.

what the **** man?!? so my 401k is going to be cut in half?!? thats real fair!!

Even if this is true, I doubt it would ever pass even if it got to a vote, but let me just say it is a really stupid idea. The reason that money you contribute to your 401(k) is not counted as taxable income (up to the limit, just under $50k per year I think) is because it IS taxed when you withdraw the funds from the account. They can't honestly expect people to put up with them taxing the income going in, and coming out of the account. So, no fear people, this is just another example of people in Congress brainstorming on ways to potentially get the budget straight, only to realize it would never work anyway.

problem is with a democratic congress and president there is no voice of opposition.

Holy crap.... Thats a horrible idea...

SAVE, SAVE SAVE..

ohh were going to cut half of that for you..

and don't forget to SAVe...

for us.

Thank you: Congress.

They can't honestly expect people to put up with them taxing the income going in, and coming out of the account.

You mean kind of like the already enforced death tax?

Well, Barry has to find a way to pay for all those new programs somehow. Looks like his party has already started to figure out where to get the money.....

Out of your wallet.

Even if this is true, I doubt it would ever pass even...

Then why do they try these things? This story is typical of why we don't trust ANY democrat on taxes. They think they are entitled to our money. Leave more of it in our hands, and the country will be much better off.

I would like to see a law passed that makes every item included in a bill list the name of the legislator who proposed it and and others who supported it. Doing so would, in my opinion, make it more uncomfortable for these legislators to load bills with pork. We need to shame these guys into submission. The $700billion bailout was a prime example. The fact that so much pork was added to that bill shows these guys have completely lost their grip on reality. They have no idea where we live or where we come from.

I used to be against term limits. Now I believe its better to throw out the occassional good one in order to shake loose all of the bad.

Ok - So let me make sure I understand this.

On a sub committee - two democrats invite a professor to share some ideas about retirement and taxes. The two Dems say they would like to consider parts of her plan. Her plan (Which no one says they want to adopt 100%, no one has introduced legislation on, and no one has said they want to implement, only that they would consider ideas of her plan) includes a prevision that eliminate day breaks on 401(k).

Somehow that equals House dems contemplate abolishing 401(k) tax breaks....

WOW....

Does anyone out there understand how congress works?

Sub committees discuss issues. Then they call experts to come talk about issues and listen to their ideas. They listen to as many possible ideas they can find. After that - They talk about the ideas they like and ideas they don't like. From that point they craft legislation and float it around and allow others members to add and subtract it. Then the committee votes on it.

This is all before it's even discussed in the full house....

Mmm govt intervention at its best.

Looking at this another way, it could be a good idea.

First, the standard conservative answer

“People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny,”

And

“Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system,”

My simple response to the above comments is, fine, don't use any of my money to bail out/save all those stupid people/companies/banks that "control their own destiny".

If done right, and I want to emphasize this is Congress we are talking about, but this is just the setting up a retirement savings account that earns 3 percent a year and I assume won't suffer in bad economic times. I am also assuming this would be in addition to Social Security.

Current people with expendable cash would still be able to invest in what ever they want. I am sure the Hedge funds would not be affected so the rich can continue to take unregulated risks.

Simply, not a bad idea, but it has to be done right or not done at all. Lastly, the conservatives will have a field day in the press with this claiming unfairly that people's 401K is being taken away from them.

Looking at this another way, it could be a good idea.

First, the standard conservative answer

And

My simple response to the above comments is, fine, don't use any of my money to bail out/save all those stupid people/companies/banks that "control their own destiny".

If done right, and I want to emphasize this is Congress we are talking about, but this is just the setting up a retirement savings account that earns 3 percent a year and I assume won't suffer in bad economic times. I am also assuming this would be in addition to Social Security.

Current people with expendable cash would still be able to invest in what ever they want. I am sure the Hedge funds would not be affected so the rich can continue to take unregulated risks.

Simply, not a bad idea, but it has to be done right or not done at all. Lastly, the conservatives will have a field day in the press with this claiming unfairly that people's 401K is being taken away from them.

You honestly think its a good idea to have the social security administration run yet another program of theft of our income on top of the one they screwed up already?

I'd sleep better on a gold brick.

Get ready for 4 years of "the gov't is much better at spending your money and taking care of you than you are. It's going to be a crazy 4 years of even BIGGER gov't solutions.

got to do something to protect average people from the thieves on wall street. I'd gladly say goodbye to my $150k in the market to see wall street close for good. I haven't touched my portfolio since '99 and had contributed $35k a year to it for the 6 years previous to that, and it's worth less than what I invested almost 10 years later. And my portfolio is pretty diversified. Meanwhile, since '99, I've accumulated 2 million in equity (wealth) in real estate with just over twice my securities investments. Translation- the stock market is for chumps

I thought Republicans were opposed to giving money to people who don't pay net income taxes.

I thought Republicans were opposed to giving money to people who don't pay net income taxes.

No, conservatives are. Republicans, these days are not. (many, at least)

You honestly think its a good idea to have the social security administration run yet another program of theft of our income on top of the one they screwed up already?

Again, depends on the rules.

1. Will the government be allowed to touch this money in any form? Meaning, it should simply be a savings account and not be used as the current SSN is used. Unfortunately, this is the number one reason this proposal will fail because the government can't keep their hands off available money.

2. Private, greedy, wall street, banker, corporate, investment, etc. people ruined the current economy. What makes you think the government would do any worse?

3. The current way of business/rules need to be changed. That much is certain. A "knee jerk reaction" to the last thirty days is a false statement by the stupid conservatives.

I consider myself a true moderate. Meaning I vote for people and their ideas/policies. I will vote for both Republicans and Democrats in less than two weeks. This allows me to see both sides of the street and be blinded by the stupid conservatives or the liberal elitists.

Another blog talking about this

http://www.usnews.com/blogs/capital-commerce/2008/10/23/would-obama-dems-kill-401k-plans.html

Would Obama, Dems Kill 401(k) Plans?

October 23, 2008 10:47 AM ET | James Pethokoukis | Permanent Link | Print

I hate to use the "S" word, but the American government would never do something as, well, socialist as seize private pension funds, right? This is exactly what cash-strapped Argentina just did in the name of protecting workers' retirement accounts (Efharisto, Fausta's Blog). Now, even Uncle Sam isn't that stupid, but some Democrats might try something almost as loopy: kill 401(k) plans.

House Democrats recently invited Teresa Ghilarducci, a professor at the New School of Social Research, to testify before a subcommittee on her idea to eliminate the preferential tax treatment of the popular retirement plans. In place of 401(k) plans, she would have workers transfer their dough into government-created "guaranteed retirement accounts" for every worker. The government would deposit $600 (inflation indexed) every year into the GRAs. Each worker would also have to save 5 percent of pay into the accounts, to which the government would pay a measly 3 percent return. Rep. Jim McDermott, a Democrat from Washington and chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, said that since "the savings rate isn't going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should."

A few respectful observations:

1) McDermott is right when he says the savings rate isn't going up. But the savings rate doesn't include gains to money you invest in the stock market. It ignores the buildup of net worth. (If you bought a share of XYZ Corp. in January at $100, for instance, and its value doubled by December, the savings rate measure would still value that investment at $100. In short, the savings rate is a phony number.)

2) So based partly on the above faulty logic, the $4.5 trillion, as of the start of the year, invested in 401(k) plans doesn't count as savings.

3) Ghilarducci would have workers abandon the stock market right at the bottom of the market. A stupid idea, according to Warren Buffett: "I don't like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: 'Put your mouth where your money was.' Today my money and my mouth both say equities."

4) Ghilarducci would offer a lousy 3 percent return. The long-run return of the stock market, adjusted for inflation, is more like 7 percent. Look at it this way: Ten thousand dollars growing at 3 percent a year for 40 years leaves you with roughly $22,000. But $10,000 growing at 7 percent a year for 40 years leaves you with $150,000. That is a high price to pay for what Ghilarducci describes as the removal of "a source of financial anxiety and...fruitless discussions with brokers and financial sales agents, who are also desperate for more fees and are often wrong about markets." Please, I'll take a bit of worry for an additional $128,000.

5) What effect would this plan have on an already battered stock market? Well, I would imagine it would send it even lower, sticking a shiv into the portfolios of everyone who didn't jump aboard. But I am sure the Chinese would love to jump in and buy all our cheap stocks to fund the retirement of their citizens.

My bottom line: If you believe in the long-run dynamism of the American economy, then you have to believe in the stock market. Listen to superinvestor Buffett, not the prof from the New School.

This is an absolutely retarded plan......Middle-lower class folks aren't going to be able to retire if the money they are putting away is only growing 3%....3% is a terrible yield for a retirement account.

This is just the tip of the iceberg

With 60 senators and a 60 seat advantage in the house, along with President Obama, these ideas will certainly start to gain more momentum

And as a democrat who works in financial services I can say this does wreak of socialism... I highly doubt this is the sentiment of the Democratic party as a whole, this plan would never pass regardless of what party is controlling congress.

And as a democrat who works in financial services I can say this does wreak of socialism... I highly doubt this is the sentiment of the Democratic party as a whole, this plan would never pass regardless of what party is controlling congress.

what makes you believe that when both Dems and GOP seem to be adopting, willingly, more and more socialist plans already?