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Monday, January 18, 2010

Government Takeover of 401(k)s and IRAs?

Bloomberg reports that the Obama Administration is considering measures to encourage Americans to convert their 401(k)s and IRAs into Government-provided annuities. The story has attracted a lot of negative commentary in the blogosphere:

(Hat Tip: InstaPundit.)

http://taxprof.typepad.com/taxprof_blog/2010/01/government.html

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Comments

I wonder which insurance geniuses are behind this scam. Well, let's see how much dumber and lazy American's can prove themselves to be.

I always wondered what happened to the real snake oil salesman. Apparently they got law degrees and moved to D.C.

Posted by: Spankin Old | Jan 18, 2010 9:45:04 AM

If Bloomberg is right, what a good idea! Make the reliable pension system look more like Social Security. Wow, are they serious?

Posted by: drtaxsacto | Jan 18, 2010 9:49:12 AM

I have actually been predicting something like this for about 10 years (government takeover of IRA / 401Ks). Way too much money for them to resist. My husband and friends used to laugh at me. Funny, they're not laughing now. In fact, they haven't been laughing since about November 2008.

Posted by: Lily | Jan 18, 2010 10:10:25 AM

Social Security is an inflation-adjusted annuity, insurance against outliving your income, at the cost of (most of the time) getting out less than you put in.

The inflation adjustment would be hard to duplicate in the private market; inflation is an uninsurable event because all your policies go bad at once.

The rollover idea would be useful if the inflation adjustment is put in.

On the other hand, who is going to buy all the stock in 401k's. And that cash must be returned to the economy right away by the Treasury, so it could work like a money grab and frittering-away rather easily.

Social Security can always be actuarily balanced by raising the retirement age; you'd have to put that in the annuities too, lest it threaten national solvency.

Posted by: rhhardin | Jan 18, 2010 10:17:42 AM

As a financial planner, I often encourage clients to consider annuitizing a part of their defined contribution plans to cover fixed expenses. There are good financial reasons to annuitize a part of your savings especially if you aren't covered by a defined benefit plan (aka pension plan).

However, it should be an individual decision based upon your own financial circumstances and not something mandated by the government. The only thing worse than a government-mandated annuity would be a government-run annuity.

Posted by: J Richardson | Jan 18, 2010 10:28:04 AM

This administration already took over 2/3 of the Big 3 automakers

Its in the process of taking over 1/6 of the economy in the healthcare industry

Why not take over your retirement savings plan, too?
Of course, that's the only place you can invest to try to keep pace with the devastating effects of inflation, which our current fiscal policies are set to create.
So now your IRA can go broke right along with Medicare and Social Security.

Good frickin' grief

Posted by: Tax Jock | Jan 18, 2010 10:29:44 AM

I am heating up the tar and stocking up on feather pillows just on the rumor. I would hate to be unprepared if such a scheme were to gain so much as serious consideration.

Posted by: MJBrutus | Jan 18, 2010 10:29:57 AM

Anyone who has ever been exposed to annuity sales people is not likely to support this.

Posted by: hoipolloi | Jan 18, 2010 10:36:04 AM

The govt can have my 401(k) and IRA when they pry them from my cold, dead hands.

Posted by: The Dude | Jan 18, 2010 10:40:01 AM

rhhardin said:

"Social Security is an inflation-adjusted annuity, insurance against outliving your income, at the cost of (most of the time) getting out less than you put in."

Assuming, of course, that inflation is measured correctly and that our elected "rulers" resist the temptation to "shade" the numbers in favor of reducing government obligations so as to afford other "benefits" such as nationalized healthcare. Anybody trust our current cabal of politicians???

VOTE **ALL** INCUMBENTS OUT!!!!

Posted by: Otto Maddox | Jan 18, 2010 10:46:25 AM

It would be a travesty if the American people allowed any version of such a takeover to happen. The proper response is uniform, bipartisian outrage.

We know that 2010 and possibly 2011 must bring to light the problems with pension funds - union, state and local municipal, and various private funds. They were designed to be adequately capitalized with 8% returns. Now their capital is diminished, and 0-3% returns are likely. A fix is nationalization outright or insideously, yet the unfortunate truth is that the ultimate responsible party for these messes should not be the federal government.

Venezuela and Argentina did this, taking the retirement funds of their citizens, and those people are now largely penniless.

The tsunami of the pension fund crisis is a crisis which can be brought into the public and media attention sphere at essentially any moment at which it is politically expedient.

Government effort to take the accumulated wealth of the citizens' retirement may not be a crude, blunt frontal effort, but sutle. For example, mutual funds and other instruments when approved for retirement plans might be required to have a certain percentage of government securities set by an "agency determination".

Posted by: Spendulus | Jan 18, 2010 10:46:53 AM

Never, never, never underestimate the capacity of government to become avaricous with your money. It is a habit which they acquired over many decades. They will not make financial changes which are beneficial to any cause other than the expansion of their own interests.

Posted by: Cecil Moon | Jan 18, 2010 10:57:41 AM

This fits given the comment made a couple months ago by a Dem Congressman how IRAs 'cost' the Government too much.

Of course the cost being reduced revenue from tax payments.

Posted by: Fred Fry | Jan 18, 2010 11:09:24 AM

These people are breathtakingly STUPID!!

If the Dim party wants to totally DIE, then go right ahead and TRY to do this.

JUST TRY!! What part of tar, feathers and pitchforks do they NOT UNDERSTAND????

Affirmative action + Peter Principle = Obama

MMMMMM......MMMMMMM......MMMMMMM

Posted by: Charlotte | Jan 18, 2010 11:12:04 AM

There are a lot of people who have hundreds of thousands of hard-earned dollars in their retirement savings. Want to be they would be willing to put $0.35 of lead between their congressman's running lights, to protect those hundreds of thousands?

Posted by: RJGatorEsq. | Jan 18, 2010 11:24:56 AM

401K holders are nothing but hoarders of capital!

Death to the Kulaks!

Posted by: blackminorca | Jan 18, 2010 11:49:42 AM

Want the American people to shortcut straight to the ammo box? Do this.

Posted by: RagnarD | Jan 18, 2010 12:08:54 PM

America is at a "delicate" point right now; it may be too late to start working within the system, and a bit too early to start shooting the bastards. So...tar & feathers work for me should they attempt ANYTHING that looks, feels, or smells like this blatant theft scheme.

Posted by: Punkindrublic | Jan 18, 2010 12:15:52 PM

Time to become a gold bug and hold physical precious metals. I wish it didn't have to come to this.

Posted by: rob | Jan 18, 2010 12:23:51 PM

Think we're pissed off now? Go ahead, Congress, try it. Make my day.

Posted by: SukieTawdry | Jan 18, 2010 12:27:25 PM

Gee, what an idea. Then congress will spend every penny of it and then some the instant they get it and your annuity fund will be filled with IOUs. Just like social security.

Posted by: Choey | Jan 18, 2010 12:49:23 PM

really what's the big deal?

if the gov't wants your money, they will just raise taxes, or inflate away the debt at the expense of the dolar, or invent some new way to entice you to give it to them (like this).

if Goldman Sachs and the Wall Street sharks want your money, they will inflate the market, crash it, and buy it back for pennies on the dollar, making insane profits while getting more taxpayer bailouts.

or maybe the insurance companies will take it...

any way you lose.

at the end of the day, electronic financial blips in a bank account aren't even worth the electrons that light up your online statement.

return on passive investment is a privilege for the few, not a right for the masses.

if you can't stomach the inevitable results of our pyramid financial system and its petty pharaohs, then convert your wealth to tangible assets and/or productive capacity of your choice and stop whining!

Posted by: tommus | Jan 18, 2010 12:53:39 PM

You know they want this money and the money in private pensions. But they can't get it because people would literally shoot their congressman.

So they're borrowing to spend the money. Once the debt gets to a certain size, they will print money to pay it off. The resulting currency devaluation will cause your 401K savings to be worth half what it was. In this way, they can spend half of your 401K out from under you. The amount in your retirement account stays the same, it just buys half as much. Congress spends the other half. And you're left wondering why you're poor.

Posted by: Ben White | Jan 18, 2010 12:58:28 PM

Knowing how much money was in these programs,I knew that it wouldn't be long before the bureaucrat's would be unable to resist keeping their hands off of them.
My wife and I traded all of our funds in a few years ago and have almost doubled our money from gold,I would do it all over again-especially now!
I sleep like a baby,do you?

Posted by: Dave | Jan 18, 2010 1:08:17 PM

Two things:
1) This has already been done in Argentina. (Gosh - they have a charismatic leader who likes to spend money, too, don't they?
2) This may be the only option the Treasury has if the T-bill market tanks (e.g. China stopping new purchases, China selling (yikes!) or even - Social Security needing to cash in some of those IOUs to pay current retirees).

Posted by: MrJimm | Jan 18, 2010 1:17:07 PM

I am with those who will be watering the tree of liberty. This shall not stand.

Posted by: Bill Johnson | Jan 18, 2010 1:33:20 PM

JUST TRY!! What part of tar, feathers and pitchforks do they NOT UNDERSTAND????

Want to be they would be willing to put $0.35 of lead between their congressman's running lights, to protect those hundreds of thousands?

I am heating up the tar and stocking up on feather pillows just on the rumor. I would hate to be unprepared if such a scheme were to gain so much as serious consideration.

The govt can have my 401(k) and IRA when they pry them from my cold, dead hands.

Want the American people to shortcut straight to the ammo box? Do this.

Think we're pissed off now? Go ahead, Congress, try it. Make my day.

This sort of reaction is why I expect inflation to be the chosen method of confiscation. Anything else, be it spending cuts (even though this IS the only real solution), higher taxation, or this sort of thing, is too obviously and directly theft.

Inflation, however, is a very abstract thing. Unlike the other methods, which result in immediate impoverishment to their victims, inflation works behind the scenes and is easy to obscure (e.g. by the "borrow, then print" model noted above). By the time it shows up as rising prices, often a decade or two later, it's too late to do anything about it, and the perpetrators are long gone. Instead, the people can only direct their impotent anger at the "greedy" shopkeeper they see raising his prices, or the hapless current occupant of the White House.

Posted by: Seerak | Jan 18, 2010 1:34:05 PM

note to my earlier comment: spending cuts are NOT actually theft -- they are the only option that aren't -- but are nonetheless not politically feasible at this time.

Posted by: Seerak | Jan 18, 2010 1:36:02 PM

That new “Consumer Protection Agency” that Obama and the Hill are pushing along should be the first to tell us that these financial instruments are probably unsound, but they won’t .. and there will be nobody who can be sued.

Posted by: Neo | Jan 18, 2010 3:16:05 PM

Without diminishing any of the comments above in the least, if true, this proposal confirms that the current Administration is guided by Marxism. Let's all hope our Republic should not suffer such a shabby death.

Posted by: Jake | Jan 18, 2010 3:57:24 PM

This is actually good news. If the banks ever are in danger of collapse again, people won't be whining about where the money for the next bailout is coming from. This will help demolish this "us" and "them" mentality between citizen and government and I predict many Americans will see it as their patriotic duty to put their retirement savings on the line for the benefit of us all.

Posted by: WRosencratz | Jan 18, 2010 5:21:44 PM

Some of us are emptying our 401Ks now in anticipation of this to pay off all our debts. If you're debt-free you may be poor but you'll have peace of mind. Very few Americans are debt-free. This would be the time to become so.

Posted by: Peg C. | Jan 18, 2010 6:04:51 PM

I yield to no one in my disdain for the Obama administration, but I think some of the vitriol directed at this proposal is overblown. From what I've read, it's a push to give people the option of an annuity at retirement, not a requirement to invest your 401(k)/IRA in Treasuries.

Annuitizing part of your assets at retirement to ensure you don't outlive all your money can be a very sound strategy, assuming it's an immediate annuity with low costs, and not the high-cost variable annuities that have a deservedly sketchy reputation.

The most recent issue of Money magazine had some 401k recommendations, and immediate annuities were favorably mentioned:

Another option: At retirement, invest some of your savings in an immediate annuity, which will give you a regular monthly paycheck. Compare offerings at immediateannuities.com, and stick with a financially strong insurer, rated A or better from A.M. Best or Standard & Poor's. Treasury officials are now pushing for an automatic annuity option in 401(k) plans. But until that happens, you'll have to provide your own life vest.

http://money.cnn.com/2010/01/18/pf/growth_401k.moneymag/index.htm

Given the number of broken Obama promises so far, we should certainly keep an eye on this and make sure it stays as just an option. If it does, I don't see the problem.

Posted by: Doug | Jan 19, 2010 4:56:54 AM

With the current trajectory of borrowing to spending I'm positive this will happen one day. And it won't matter what party is in power- they'll do it to avoid the crash for a little longer.

Posted by: JackWayne | Jan 19, 2010 10:09:26 AM