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.

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.

“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.

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.

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

"....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...."

The New School for Social Research

The Department of Political Science at The New School for Social Research takes a distinctive approach to the study of politics. We emphasize the theoretical dimension of political analysis with regard to both political explanation and normative evaluation. We focus on the historical roots of contemporary political forces and problems. Faculty members are interested in how institutions shape political life, in the intersection between political and cultural processes, and in classical and current versions of political economy.

Students belong to a community of scholars constituted by faculty and students from The New School for Social Research as a whole. The Department of Political Science contributes to this community through classes, research projects, and conferences. For example, the International Center for Migration, Ethnicity, and Citizenship, directed by Aristide Zolberg, engages in research, policy analysis, and graduate education bearing on international migration, refugees, and the incorporation of newcomers into host societies. Visiting professors are an important part of our department’s life. These distinguished scholars join our faculty on a regular basis and help supervise students’ work, including dissertations.

The New School is one of the sources sited in the article.

Faculty: Political Science Dept.

Andrew Arato, Dorothy Hart Hirshon Professor of Political and Social Theory
Banu Bargu, Assistant Professor in Political Science
Daniel Dayan, Visiting Professor
Carlos Forment, Associate Professor of Sociology
Nancy Fraser, Henry A. and Louise Loeb Professor of Political and Social Science
Ellen Freeberg, Assistant Dean, New School for Social Research and Affiliated Faculty, Political Science
Philip Green, Part-Time Faculty
Victoria Hattam, Department Chair and Professor of Political Science
Agnes Heller, Hannah Arendt Professor of Philosophy and Political Science
Mala Htun, Associate Professor of Political Science
Courtney Jung, Associate Professor of Political Science
Andreas Kalyvas, Assistant Professor of Political Science
Ronald Kassimir, Associate Professor of Political Science
Riva Kastoryano, Visiting Professor
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David Plotke, Historical Studies Department Chair, Professor of Political Science
Ross Poole, Adjunct Professor of Political Science and Philosophy
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The Department of Economics offers a broad and critical approach to the study of economics, covering a wide range of schools of thought, including Keynesian and post-Keynesian economics; the classical political economy of Smith, Ricardo, and Marx; structuralist and institutionalist approaches to economics; and neoclassical economics. The courses of study emphasize the historical roots of economic ideas, their application to contemporary economic policy debates, and conflicting explanations and interpretations of economic phenomena, within the context of a rigorous training in the conceptual, mathematical, and statistical modeling techniques that are the common methodological basis of contemporary economic research. The department's work centers on the changing shape of the world economy; its financial markets and institutions; problems of regulating and guiding economic development in the advanced industrial world and in emerging markets; complexity in economic systems; and the economic aspects of class, gender, and ethnic divisions.

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Lopamudra Banerjee, Assistant Professor of Economics.
Lucas Bernard, Part-time Faculty Member
Michael Binder, Part-Time Faculty
Duncan Foley, Leo Model Professor of Economics
Teresa Ghilarducci, Professor of Economics.Bernard L. and Irene Schwartz Chair in Economic Policy Analysis.
M. Ali Khan, Part-Time Faculty
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