RALEIGH
— Democrats in the U.S. House have been conducting hearings on
proposals to confiscate workers’ personal retirement accounts —
including 401(k)s and IRAs — and convert them to accounts managed by
the Social Security Administration.
Triggered by the financial crisis the past two months, the hearings
reportedly were meant to stem losses incurred by many workers and
retirees whose 401(k) and IRA balances have been shrinking rapidly.
The testimony of Teresa Ghilarducci, professor of economic policy
analysis at the New School for Social Research in New York, in hearings
Oct. 7 drew the most attention and criticism. Testifying for the House
Committee on Education and Labor, Ghilarducci proposed that the
government eliminate tax breaks for 401(k) and similar retirement
accounts, such as IRAs, and confiscate workers’ retirement plan
accounts and convert them to universal Guaranteed Retirement Accounts
(GRAs) managed by the Social Security Administration.
Rep. George Miller, D-Calif., chairman of the House Committee on
Education and Labor, in prepared remarks for the hearing on “The Impact
of the Financial Crisis on Workers’ Retirement Security,” blamed Wall
Street for the financial crisis and said his committee will “strengthen
and protect Americans’ 401(k)s, pensions, and other retirement plans”
and the “Democratic Congress will continue to conduct this much-needed
oversight on behalf of the American people.”
Currently, 401(k) plans allow Americans to invest pretax money and
their employers match up to a defined percentage, which not only
increases workers’ retirement savings but also reduces their annual
income tax. The balances are fully inheritable, subject to income tax,
meaning workers pass on their wealth to their heirs, unlike Social
Security. Even when they leave an employer and go to one that doesn’t
offer a 401(k) or pension, workers can transfer their balances to a
qualified IRA.
Mandating Equality
Ghilarducci’s plan first appeared in a paper for the Economic Policy
Institute: Agenda for Shared Prosperity on Nov. 20, 2007, in which she
said GRAs will rescue the flawed American retirement income system (www.sharedprosperity.org/bp204/bp204.pdf).
The current retirement system, Ghilarducci said, “exacerbates income
and wealth inequalities” because tax breaks for voluntary retirement
accounts are “skewed to the wealthy because it is easier for them to
save, and because they receive bigger tax breaks when they do.”
Lauding GRAs as a way to effectively increase retirement savings,
Ghilarducci wrote that savings incentives are unequal for rich and poor
families because tax deferrals “provide a much larger ‘carrot’ to
wealthy families than to middle-class families — and none whatsoever
for families too poor to owe taxes.”
GRAs would guarantee a fixed 3 percent annual rate of return, although
later in her article Ghilarducci explained that participants would not
“earn a 3% real return in perpetuity.” In place of tax breaks workers
now receive for contributions and thus a lower tax rate, workers would
receive $600 annually from the government, inflation-adjusted. For
low-income workers whose annual contributions are less than $600, the
government would deposit whatever amount it would take to equal the
minimum $600 for all participants.
In a radio interview with Kirby Wilbur in Seattle on Oct. 27, 2008,
Ghilarducci explained that her proposal doesn’t eliminate the tax
breaks, rather, “I’m just rearranging the tax breaks that are available
now for 401(k)s and spreading — spreading the wealth.”
All workers would have 5 percent of their annual pay deducted from
their paychecks and deposited to the GRA. They would still be paying
Social Security and Medicare taxes, as would the employers. The GRA
contribution would be shared equally by the worker and the employee.
Employers no longer would be able to write off their contributions. Any
capital gains would be taxable year-on-year.
Analysts point to another disturbing part of the plan. With a GRA,
workers could bequeath only half of their account balances to their
heirs, unlike full balances from existing 401(k) and IRA accounts. For
workers who die after retiring, they could bequeath just their own
contributions plus the interest but minus any benefits received and
minus the employer contributions.
Another justification for Ghilarducci’s plan is to eliminate investment
risk. In her testimony, Ghilarducci said, “humans often lack the
foresight, discipline, and investing skills required to sustain a
savings plan.” She cited the 2004 HSBC global survey on the Future of
Retirement, in which she claimed that “a third of Americans wanted the
government to force them to save more for retirement.”
What the survey actually reported was that 33 percent of Americans
wanted the government to “enforce additional private savings,” a vastly
different meaning than mandatory government-run savings. Of the four
potential sources of retirement support, which were government,
employer, family, and self, the majority of Americans said “self” was
the most important contributor, followed by “government.” When broken
out by family income, low-income U.S. households said the “government”
was the most important retirement support, whereas high-income families
ranked “government” last and “self” first (www.hsbc.com/retirement).
On Oct. 22, The Wall Street Journal reported that the
Argentinean government had seized all private pension and retirement
accounts to fund government programs and to address a ballooning
deficit. Fearing an economic collapse, foreign investors quickly pulled
out, forcing the Argentinean stock market to shut down several times.
More than 10 years ago, nationalization of private savings sent
Argentina’s economy into a long-term downward spiral.
Income and Wealth Redistribution
The majority of witness testimony during recent hearings before the
House Committee on Education and Labor showed that congressional
Democrats intend to address income and wealth inequality through
redistribution.
On July 31, 2008, Robert Greenstein, executive director of the Center
on Budget and Policy Priorities, testified before the subcommittee on
workforce protections that “from the standpoint of equal treatment of
people with different incomes, there is a fundamental flaw” in tax code
incentives because they are “provided in the form of deductions,
exemptions, and exclusions rather than in the form of refundable tax
credits.”
Even people who don’t pay taxes should get money from the government,
paid for by higher-income Americans, he said. “There is no obvious
reason why lower-income taxpayers or people who do not file income
taxes should get smaller incentives (or no tax incentives at all),”
Greenstein said.
“Moving to refundable tax credits for promoting socially worthwhile
activities would be an important step toward enhancing progressivity in
the tax code in a way that would improve economic efficiency and
performance at the same time,” Greenstein said, and “reducing barriers
to labor organizing, preserving the real value of the minimum wage, and
the other workforce security concerns . . . would contribute to an
economy with less glaring and sharply widening inequality.”
When asked whether committee members seriously were considering
Ghilarducci’s proposal for GSAs, Aaron Albright, press secretary for
the Committee on Education and Labor, said Miller and other members
were listening to all ideas.
Miller’s biggest priority has been on legislation aimed at greater
transparency in 401(k)s and other retirement plan administration,
specifically regarding fees, Albright said, and he sent a link to a Fox
News interview of Miller on Oct. 24, 2008, to show that the congressman
had not made a decision.
After repeated questions asked by Neil Cavuto of Fox News, Miller said
he would not be in favor of “killing the 401(k)” or of “killing the tax
advantages for 401(k)s.”
Arguing against liberal prescriptions, William Beach, director of the
Center for Data Analysis at the Heritage Foundation, testified on Oct.
24 that the “roots of the current crisis are firmly planted in public
policy mistakes” by the Federal Reserve and Congress. He cautioned
Congress against raising taxes, increasing burdensome regulations, or
withdrawing from international product or capital markets. “Congress
can ill afford to repeat the awesome errors of its predecessor in the
early days of the Great Depression,” Beach said.
Instead, Beach said, Congress could best address the financial crisis
by making the tax reductions of 2001 and 2003 permanent, stopping
dependence on demand-side stimulus, lowering the corporate profits tax,
and reducing or eliminating taxes on capital gains and dividends.
Testifying before the same committee in early October, Jerry Bramlett,
president and CEO of BenefitStreet, Inc., an independent 401(k) plan
administrator, said one of the best ways to ensure retirement security
would be to have the U.S. Department of Labor develop educational
materials for workers so they could make better investment decisions,
not exchange equity investments in retirement accounts for Treasury
bills, as proposed in the GSAs.
Should Sen. Barack Obama win the presidency, congressional Democrats
might have stronger support for their “spreading the wealth” agenda. On
Oct. 27, the American Thinker posted a video of an interview with Obama
on public radio station WBEZ-FM from 2001.
In the interview, Obama said, “The Supreme Court never ventured into
the issues of redistribution of wealth, and of more basic issues such
as political and economic justice in society.” The Constitution says
only what “the states can’t do to you. Says what the Federal government
can’t do to you,” and Obama added that the Warren Court wasn’t that
radical.
Although in 2001 Obama said he was not “optimistic about bringing major
redistributive change through the courts,” as president, he would
likely have the opportunity to appoint one or more Supreme Court
justices.
“The real tragedy of the civil rights movement was, um, because the
civil rights movement became so court focused that I think there was a
tendency to lose track of the political and community organizing and
activities on the ground that are able to put together the actual
coalition of powers through which you bring about redistributive
change,” Obama said.
Karen McMahan is a contributing editor of Carolina Journal.
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