A Stitch in Haste

Or, perhaps better stated: Do the Democrats even understand the implications of their proposals?

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.
…
Under [the] 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.

Of course, the bulk of the outrage from this story, at least that I saw, was over that last part. For two reasons. First of course is its deliciously leftist, soak-the-(nowhere-near-)rich class warfare. (Do you really think a Wall Street CEO gives a hoot in heck about the tax implications of her annual $15,500 401(k) contribution? The 401(k) is a program for the middle class, not the “obscenely” wealthy.)

Second is the sheer inaccuracy of the proposal’s premises. The tax benefit of a 401(k) or similar vehicle is tax deferment, not tax reduction. The money gets taxed when it’s withdrawn rather than when it’s earned. Oh the inequity!

(Yes, I’m aware that if the holder of a 401(k) account has the impudence to die before he withdraws the money, then the corpus of the account will generally escape income taxes. But do progressives really hate people so much that they damn them for dying prematurely? I would hope not.)

In any event, I was less astonished by the proposal regarding eliminating 401(k) tax advantages than with the proposed replacement program: A new, government-run mini-account that workers would fund from their paychecks. A new payroll deduction that would not revert to the government and would not buy an poorly performing life annuity to commence in the distant future and backed only by the full faith and credit of the United States Government. This new program would instead stay in a fully vested account, owned by the worker, presumably fully accessible and controllable upon retirement and transferable to the worker’s estate in the event of her pre-retirement death.

Excuse me, but isn’t that partial privatization of Social Security? The same sort of partial privatization that liberals denounced as dangerous and indeed evil?

This proposal (which, incidentally, is just a proposal — jawboned by a partisan academic in a backwater congressional hearing; there is no bill under consideration, nor is there likely ever to be one) is barely distinguishable from the Bush administration’s proposal; the backbones of the two programs are essentially identical.

The only differences between the Bush proposal and this version are:

1. The Bush proposal was voluntary; this proposal is compulsory.
2. The Bush proposal would not have repealed or crippled 401(k) vehicles (i.e., the Bush plan pursued the policy goal of “fostering retirement saving” while this proposal pursues the policy goal of “class warfare”).
3. The Bush proposal would have given participants greater control over how to invest the new accounts — stocks, bonds or cash, depending on risk tolerances; this proposal forces participants (i.e., everyone) to buy government bonds that pay a rather measly 3% coupon.

Some things never change, including the ability of politicians and central planner wannabes to damn the opposition for an idea, only to later repackage and praise it as their own.

Concurrently via Crime & Federalism and Below the Beltway.