Immodest Proposals

Congress is actively debating solutions to shoring up Social Security, while at the same time juggling solutions to the frozen credit markets and Wall Street’s adventurous experiments with leveraged liquidity. Among several presented solutions is a bold proposal for a short-term fix that would significantly alter the American public’s savings structure, and that lays out a radically different strategy of Promoting the General Welfare.

Here is how James Pethokoukis writing for US News described it:

“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 mild argument to this strange and frightening proposal is that this was only one of several solutions floated about in the House of Representatives. But what cannot be discounted is the fact that it was taken seriously by at least one Democrat representative, Jim McDermott, who seems to be convinced that a government “investment” of $80 billion is not an effective policy towards increasing the savings rate of the American people. So convinced, despite referencing rate figures that flatly discount the accumulative growth of those same tax-deferred savings.

And here is a summary of the recent testimony Ms. Ghilarducci gave before the House Committee on Education and Labor.

“On Oct. 7, they heard testimony from Teresa Ghilarducci, an economics professor from The New School for Social Research in New York. She proposed a radical, short-term fix, where 401(k) plans would be turned over to a guaranteed retirement account composed of government bonds earning a 3 percent annual return, adjusted for inflation.

When workers begin collecting Social Security, the account would pay them an inflation-adjusted annuity, based on the accumulated funds. For example, a 55-year-old worker with $50,000 in a 401(k) account in August would swap out the $50,000 for a guarantee of $500 per month in retirement.”

And what about a long-term solution?

“Ghilarducci proposed the creation of universal guaranteed retirement accounts in which the federal government invests $600 for every worker. Workers would put 5 percent of their pay in and the account would earn a guaranteed 3 percent rate of return, plus inflation. The cost of this plan would be offset by doing away with most tax breaks currently offered on 401(k) accounts, so the government wouldn't have to pay any more than it does now. The accounts would be safer and guarantee all workers an income during retirement.”


One can only assume that for this solution to work, if backed by the public, it would necessitate the complete removal of the 401(k) stipulation in the tax code, eliminating the most common vehicle for the accumulation of private savings and wealth, and essentially replacing it with a mandated “universal” retirement tax. All this on top of income tax, and Social Security. And you can bet your (literally) bottom dollar that there would be no survivorship to these accounts, nor liquidity access, nor any other freedom of asset management, despite being required to fund them with 5% of your hard-earned wages.

That’s socialism. But it’s all okay because “the government wouldn’t have to pay any more than it does now.” Did everyone get that? By not taxing a portion of a person’s income that is set aside for future, private capital, as is the current 401(k) system, the government is consequently unable to spend it, which according to the government translates to paying us. So I guess it’s all a matter of what kind of socialism we prefer.

Or semantics.


But what may be most frightening of all is the evident support among the constituency.

Here’s a reader’s talkback post from the above U.S. News article.

Solves social security meltdown
In a sense, this plan is brilliant. At 3% return for the defined benefit program, the Obama administration can move inflation up to 10-12% and eliminate the future social security meltdown problem. Of course, we have to get rid of the cost-of-living adjustments for social security (one of which just kicked in giving rich elderly a 5% bonus while they performed no work, while most American workers are lucky to see a 1-2% wage adjustment annually).
I'm encouraged that Obama will make our senior citizens earn their paychecks. Michelle spoke at length that people will be made to work and there will be no shortages of volunteering opportunities. Let's clean up our streets, get seniors out raking leaves, picking up trash, cleaning up dog droppings in our parks, mowing city property, mentoring children in the schools and serving other useful functions. Every government dollar provided should be met with enthusiastic joy and reciprocity by the receiving citizen. An idle citizen is an unappreciated citizen.
redherkey of NE
Oct 23, 2008 14:22:17 PM [permalink] [report comment]