Posted on 10/24/2008 2:04:09 PM PDT by RetiredArmy
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-HAMAS (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.
SS = Slaves of the State
No we CAN’T PRIVATIZE A PORTION OF SOCIAL SECURITY TO SAVE IT BE WE SURE CAN RAID PRIVATIZED 401K’S TO SAVE SOCIAL SECURITY!!!
THIS JUST REINFORCES THE CASE FOR PRIVATIZATION!!
Scary
BE = BUT
ANd so it begins.The pathway to Socialism.
This alone will cause the Demos to lose Congress in 2010 if implemented. Are they really this stupid? (Rhetorical)
I posted this the other day. The democrats are looking for a down 3000.
They want to win at all costs. The reason why Wall Street is crashing and burning are political with the democrats creating a panic on Wall Street and worldwide.
This is socialism at it’s best.
Otherwise, this old broad is advocating something little different from "W"'s Social Security privatization deal with a hidden increase in Social Security taxes.
Folks will continue to direct their investment dollars to the stock market and will pay no taxes on their investments at all until they make "withdrawals", and then pay only at the capital gains rate.
See how easy it was for that woman to TRICK Democrats?
This will be the end. Why bother working, when the Democrats are going to take all your money?
Assholes. Pardon my Norwegian.
I will opt for early withdraw if they pull this crap!
Remember now, only racists would criticize this plan and call it socialist.
I have been talking to everyone I can today about this. If the dem’s are allowed to get away with this and the RNC and Republicans don’t get in front of the microphones and spread this, it will be disasterous! Hacks me off!
Privatizing Social Security can’t be discussed, but this is okay?
Thanks very much for posting.
UNFRIKKENBELIEVABLE! Socialist security is the greatest fraud ever forced on “free people”. These SOCIALIST SCUMBAGS are finding new ways to plunder our time of life and the meager savings we have accumulated through our hard work.
Un-F@#$%^G-Believeable!
The BASTARDS who managed to engineer the financial meltdown are now going to FORCE US to use their solution, and steal even MORE money from us...
Mark
This is only a glimpse of what a rat Congress will do if The Zero wins. It will be challenged of course in the courts, where this theft will be found “Constitutional.”
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