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.
Bush won’t sign on to this TAX increase the question is will OBAMA pass this?
How about all the other tax increases that a Dem Congress will be dreaming up. Do you people think Obama will veto them? LoL! Obama has voted yes for every tax increase he has ever seen. Obama lies out both ends.
Yeah, Obama will be saying no (ROLFL) to Pelosi and Reid when their tax increase bills start moving across his desk.
Dictators think and operate the same way.
It's the product of not teaching history. Most of the bubbleheads voting for this guy don't even know what "IT" is.
They're about to get a crash course.
“They’re about to get a crash course.”
Not if we stop them.
Once they get a foothold, the hard-core left, that is, there will be no recourse.
We cannot allow that to happen.
Even if 0bama does win, and I don’t think he will, we must give ourselves over to the fight for our freedom.
Life will not be like it has been and shouldn’t be if we are fighting hard enough.
We can no longer depend on our leaders to defend us. There is the nasty, rotten smell of apathy and cynicism in the air of late. This is a moral fog created by the left to daze and confuse — to confound the freeman’s survival instinct.
Just like the vampire bat’s analgesic saliva will the left’s “kind-hearted” message and “political correctness” serve as a guise and diversion to conceal their true purpose of bleeding you—for your own good, of course.
The perception is that things are “more complex now” or “the population is too big” — we, as men have not changed all that much. The basic principles that guided the founders 200 years ago still apply today.
We have to bring the ideas of individual freedom and limited government to the forefront again and keep them there.
These aren’t radical ideas — they are the very ideas of the founding fathers. The ideas that formed the basis of our constitution.
We cannot sit back and merely complain about the way things are going — we have to become activists again.
The left is fighting tooth and nail to achieve their ugly end. Will we fight?
No one is coming. We defend our freedom or it simply does not get defended.
I thought this was called "social security". Don't we already do that at the point of a gun?
You summed up the entire article right there.
People will go to a cash system. No doubt they are devising a plan to track or do away with cash. Then the people will go to a bartering system. Then I supposed our overlords will enforce prima nochta. It won't stop until WE THE (little) PEOPLE understand we are ruled.
I hope you’re taking your entire conservative neighborhood to vote with you. Evidently CO is a huge swing state this election...don’t let us down
I’ve never seen South Park.
But that explains your presence in so many WR Reports ;^)
These people must be defeated.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.