The government wants your 401(k)

Hey, maybe Al Gore’s lockbox will get a chance to play after all:

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.

Yeaggh. I’m glad I cashed in my 401(k) when I changed jobs a couple of years ago.

There are a number of disturbing aspects to Ghilarducci’s GRA plan. First, it’s mandatory. I’m sorry, but while the 401(k) is not a perfect investment plan, at least no one forces me to contribute. Ghilarducci’s plan would require me, and all workers, to deposit 5% of my income in a GRA — unless I already contributed at least 5% to an employer-administered retirement plan — in addition to Social Security and Medicare taxes, and capital gains on the account would be taxed year-on-year.

Second, the GRA’s rate of return under Ghilarducci’s plan is a fixed 3%, adjusted for inflation. Now, consider that the government has changed the way it calculates the rate of inflation twice in the last 30 years. The official rate of inflation is about 5%. The rate as it was calculated prior to 1980 is about 13%. Thus the GRA offers a real return of about negative 5%.

I’d rather take my chances, or even spend my money now before it devalues further.

Perhaps most disturbing is that only half of the savings accumulated by a worker under the plan could be passed down to his or her heirs. I probably won’t leave much of an estate, but I’d rather my daughter get it than the government.

As risky as it is to invest your money in the free market, the government’s $55 trillion deficit convinces me that it’s not going to do any better. Nor do I want my retirement money considered a potential source of bailout funds for the next industry that’s “too big to fail”.

And while it may sound selfish, I really don’t like the idea of being forced into a plan that offers retirement benefits to workers who don’t even contribute.

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