This is an update the story posted October 9th.
If I were to say “pay into a guaranteed retirement account administered by the Social Security Administration.” You woudl say, “I already know about Social Security, so what?”. Well you woudl be wrong. See this is the “new” retirement alternative being contemplated by the Democrats in the house.
The Theory goes… Since the Stock Market has taken such a hit, it proves the falsity of the idea of investing your retirement in US stocks. Therefore, we should use the money from the program to design a better program.
At least three major problems with this “theory”.
First, there is not money in this system that the government has any right to. You see in the minds of a Liberal Democrat a tax incentive to invest in your own retirement (a goal set forth by the law) is money they don’t have. It is counted as money the rotten-evil-tax payers of this country dare to keep to themselves. What “tax break” you ask? The taxes you did not yet pay on income placed in the 401k and the tax break for companies that match your investments. So they want to require that you put another 5% [on top of the 6%+6% that you and your employer put in today].
This leads me to invalid point number two. The tax break is a deferment of taxes until the need to extract funds. The belief is that your tax bracket may be lower at that point then it is today but there are no guarantees of that. It is hard to call that a tax break. IN fact with democrats in congress it is very possible that retirees in the coming years will find that they are withdrwing at a higher bracket then when they started putting in the money in the 1980s and 1990s.
The third and most reveling of the falseness of their arguments is that the new funds would be “invested in special government bonds that would pay 3 percent a year”. Oh sooo many issues… “Special”… you mean like “Freddie Mac Mortgage Backed Securities special”? Or more likely “Special” meaning, “I won’t tell you know because it is in the general funds and to be paid back by your grandchildren’s grandchildren when I am long gone from Congress.” I digreess. On to the main point. Three percent per year. I think I can beat that with guaranteed CDs without giveing over the money the feds. Well… I took a deep breath and opened up my recent 401k statment. Really, I did it. I took a look at my rollover 401k. This is a high risk stock (98.7%) 401k from an old employer. One that is not confused by current contributions, matching and dollar cost averaging. In the past year it is down about 35%. Ouch… In the past three years it is up a misely 1.2%. If I look back 5 years it is averaging…6% a year. Yep 6% a year over 5 years including a once (twice) in a century downturn.
Since that is an annualized return $20,000 would have grown by $3579 more in the last five years then via the “new” government plan. To be fair they are offering a $600 credit so their plan have returned only $579 less, assuming I qualify for the full tax credit against my $20,000 investment. So if my retirement savings were anything over the $20,000 (which it better be if I plan on living past that first year of retirement) their plan is an even bigger loser. Note that this is already a slight loser in comparison with what can be deemed the worst economic environment for stocks in recent history.
So why would Democrats want to capitialize on the current fear to “stabalize” your retirement when it is a quaranteed loser? The simple answer is that in their mind the 80 billion dollars we all get to right off for 401k contributions is their money and they want it back. The other side of this it the unasked question… what happens to the current dollars if the 401k laws are revoked? Does that mean full conversion and a captial gains tax windfall? Would they dare wait until Obama raises captial gains from 15% up to 28%?
We shall wait and see but the mathematical answer is still to allow for direct privatized investments by individuals.