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Gutting the 401k: The Stupid Party Strikes Again
There are days when I think that the mainstream Republicans have a death wish. First, after years of promising to repeal and replace Obamacare, when they get a majority in both Houses and a cooperative President, they do nothing. Nothing in that regard, next to nothing in any other regard. A Supreme Court Justice, yes. A handful of Appeals Court judges. Otherwise, niente. It is as if they are happier in the minority than in the majority.
And when they come to tax reform, what is their big idea? To cut corporate taxes, which would be a boon, and to make up for the revenue losses that this would entail not by cutting expenditures but by gutting the 401k . The fact that their proposal that tax-free contributions to this retirement-savings vehicle be cut to $2400 a year has Wall Street up in arms bothers me not one whit. It is not the task of the US government to feed the greed of a particular industry.
It is its effect on the ordinary joe that I have in mind. I mean the fella who plays by the rules, works hard, and socks money away for his retirement, using the 401k. If self-reliance is a virtue and if promoting individual self-reliance serves the public good, as it surely does, then the provisions within the tax code providing for the 401k are among that code’s best provisions. From the perspective of macroeconomics, the 401k promotes capital formation. From the perspective of public policy, it reduces dependency. What’s not to like?
Moreover, subverting the 401k is bad politics. If Wall Street is up in arms, think about the fury that legislation of this sort will elicit from the ordinary joe once he feels the pinch. Are the Republicans in Congress so beholden to the Chamber of Commerce that they have forgotten their party’s base? If they gut the 401k, in 2018, they will lose both the House and the Senate in a landslide. Is there no one in the Republican Party’s congressional leadership who has any sense?
Published in Domestic Policy
What is about the GOP that they now & then give you the full oligarch boogeyman face?
Sometimes I think liberals bitching about the party are just trying to warn the rest of us…
There’s no real rationale for the 401k. It has no meaningful effect on net national savings, and its voluntary nature makes it a poor social insurance program. I suspect the increasing progressivity of the tax code in recent decades has also made it less valuable to average Americans, too.
That said, junking it without some sort of replacement (ideally as part of a wider Social Security reform effort) may not be such a good idea politically.
https://www.forbes.com/sites/nextavenue/2012/12/29/watch-out-your-401k-is-being-targeted/#751b5da13b8d
That’s one.
Additional information:
This is an article from August of this year talking about this:
https://www.cnbc.com/2017/08/31/congress-considers-changing-the-401k-rules.html
Also, the idea of restructuring 401Ks by the general government goes back to 2006:
http://www.heritage.org/social-security/report/pursuing-universal-retirement-security-through-automatic-iras?query=Pursuing+Universal+Retirement+Security+Through+Automatic+IRAs
Yeah, read the URL carefully. It’s brought to you by the same group of people who gave us health insurance mandates.
But the biggest example of taxing 401K contributions comes from labor economist Teresa Ghilarducci who in 2007 penned a paper that explained how they could tax the non-taxed contributions to fund a Guaranteed Retirement Account. Now, forgive the source for this for a moment and just focus on what is being said in the paper:
Source: https://www.mediamatters.org/research/2010/11/02/limbaugh-falsely-claimed-democrats-are-talking/172800
You have to scroll down about 2/3 to find the section that I am pulling this from. You will notice in the bold section the terms “subsidies” and “tax breaks” which signify that JcT is absolutely correct in saying that DC looks at your money as their money.
Not stupid, moronic. The entire, repeat entire, reason the deficit matters is because our low savings rate gives rise to the current account deficit which means we must borrow those savings abroad and import an equivalent amount of stuff. We do have to pay for the deficit, but the only to do that is by saving more, i.e. we must either cut government spending or reduce private consumption. Those are the choices.
You’ll have to explain to me why private savings have no effect on national savings.
I think this is exactly right.
Yes, indeed. And there is more to this than “gossip.”
I have no doubt in my heart they would do this in a moment. On both sides, the politicos think our money is their money.
Income Taxes are wrong in the first place.
This is not “gossip.” It is a report about what the Republicans in Congress are discussing and about the fears that this has generated on Wall Street.
I don’t do 401k or IRA. Yeah, some might call me stupid, but working in manufacturing, you can be sure to get laid off, and then you’re out of work for an extended period of time until you can find another job. That money in the 401k was my money but now I have to get government permission to use it, and pay a massive fine. Never again. I save my own money and I control it. Having a retirement fund is of no use to me if I die of starvation or lose my house because I can’t get at my 401k money.
I do my own planning and I don’t depend on shadowy promises that the government won’t suddenly change when I can get at my money.
The claim that this is just gossip is nonsense. It is an accurate report in various venues about ideas the Republicans are throwing around. We should not out of partisan loyalty suppose that the Republicans are too smart to consider such an option. We have lots of experience to belie that.
All true. But this “nudge” is extremely helpful to a great many people. It provides a fairly automatic way to save for retirement, and if one saves the legal maximum every year it really does provide enough. The model for the 401k was the quite old 403b provision that enabled academics to save for retirement through TIAA-CREF. That was a tremendous success, and the 401k has been a great blessing for an enormous number of our fellow citizens. Fiddling with it would be a disaster, and that is what the revenue-hungry Republicans are toying with . . . which is why an outcry now might do a lot of good.
The proposal described in the Wall Street Journal article is to cap the tax exemption allowed for contributions to a 401k at $2400 annually.
Additional contributions above the $2400 would still be available, as in a Roth 401k where you don’t get to deduct the initial contribution, but eventually withdrawals are tax free.
Leaving aside the question as to whether you really believe the Congress will leave the withdrawals tax free 30 years from now or whenever you’re planning on retiring, the math I’ve seen suggests that the two forms (Tax deduction at deposit, taxable at withdrawal versus taxable at deposit, tax free at withdrawal) are mathematically indistinguishable as to NPV of the cash flow to be expected at retirement.
We’re also all ignoring that the 401k is a financial product remarkably efficient at converting tax-favored Capital Gains into an income stream taxed as “ordinary income”.
I don’t know about it’s affect on actual national savings, but I believe it is true that savings accumulated in retirement accounts do not count in the statistics for “household savings”.
And don’t forget for many the employer matching in the 401k is a big deal. I wonder if the Chamber of Commerce Republicans are behind this….
To further support Professor Rahe, the academics are discussing this as well. This article: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3046077%20 was just reported in the Investment Company news feed. The industry trade association has been raising the alarm on this throughout the year, openly discussing their lobbying efforts to take 401(k) off the table. I’m not sure they haven’t scared themselves, but this was not made up by MSM.
WSJ reports this morning that Trump says 401(k) won’t be limited, so that’s something to add to the plus side for this administration. But this highlights the fact that 401(k) has created a massive pile of money for the government to go after when it can no longer borrow.
And their wish has been granted by the electorate.
See: Trump.
See: Wailing and gnashing of teeth by folks like Bill Kristol. The bell curve moves, and having writ moves on. And it has moved away from statism as the norm. But our children’s children may see as new in their time what we now long for nostalgically.
See: GWB broken silence
This is a good example of “government think” and it confuses “activity” with “results.” You are accurate in a literal sense to say they “did” something. But in fact they accomplished nothing except to maintain the status quo. They “did” something, but they did not achieve the desired result – ending and replacing ObamaCare.
This is a good example of the way professional politicians such as Rand Paul think. He thinks he is “doing something” when he votes against a bill he believes is not perfect.
If you substitute the phrase “achieved something” for the word “did” then Paul Rahe’s piece is entirely factual.
Thanks. Didn’t know that. Probably his point, which I’m still waiting for is that 401 savings come from government consumption not private consumption so in a static accounting sense, it doesn’t increase net national savings.
A) I sincerely doubt this will happen anytime soon.
B) 401ks are effectively a tax-rate arbitrage – that is, their primary benefit is the assumption that you will be paying a lower income tax rate when you withdraw the money than currently (ie, when you are deferring the income).
When we had a steeply progressive tax structure this was most likely true, but I’m less convinced it is true now that our rates are much lower and our national debt is enormous (as a percentage of GDP) which will inevitably require serious tax increases at some point in the future. Perhaps more importantly, right now, capital gains are taxed at a lower rate than ordinary income, but when you withdraw capital gains from your tax-deferred account, you pay ordinary income on those gains (at a much higher rate.)
I still max out my 401-k, but I’m not at all convinced it is the optimal tax play everyone assumes it is.
If you can put any money in a Roth IRA, I would seriously consider that, it offers some interesting tax opportunities.
I’m sure Cato Rand would be willing to help you figure out your personal investment situation.
Moderator Note:
All-caps edited down to italics.It was gossip. It was Fake News. Can we stop now?
Mark your calendars. JcTPatriot agrees with Cato Rand.
That is an excellent point! If I am saving for my retirement, why does it matter if it is pre-tax or after-tax money? I would prefer the former, but if it’s the latter, it is still my money and my retirement. Don’t get me wrong, I am still happy that this was all Fake News, but even if it had turned out to be true, I would still continue building my retirement nest egg, wouldn’t you?
Good for Trump.
I don’t know, I think what they have done on Obamacare is pretty close to nothing. They should have been able to do a vote count and figure out what their bill needed in it to reach 50. That is how we do things at the State level. Add up your yes votes then figure out what it will take to get maybe votes to yes.
Virtually all the Senators were re-elected. They voted to repeal Obamacare when Obama was President. They won’t all agree on a much smaller proposal now.
We are in enrollment for next years insurance. All the GOP’s “good work” has done nothing to keep premiums and deductibles from rising. I am not interested in their efforts or their good intentions. I am interested in their results. On Obamacare they have none.
At some point they’re going to either replace (or more likely “supplement”) the income tax with some type of consumption tax, so you’ll get taxed when you spend your savings anyway.
Robert, come on man! An article dated Dec 29, 2012 and quoting Sen. Ben Cardin, a Democrat from Maryland and Sen. Tom Harkin, a Democrat from Iowa? This is “push the old lady in a wheelchair off a cliff” scare tactics here.
This is great news. I am glad President Trump is saying no. I am not sure that the President saying no proves that GOP congressmen were not considering it. They are two separate branches and not always on the same page.
Not much in this story; I saw “Should the rules change” and “One ‘idea quietly being discussed,’ Politico reports” – Heh, Politico. Good source.
However, it did get me to that Politico story that may have been the originator of this Fake News: “One idea quietly being discussed would be taxing the money that workers place into their 401(k) savings plans up front: an idea that would raise billions of dollars in the short-term and is pulled from the Camp plan” – The author of that line was Nancy Cook, reporter for Politico, formerly of Newsweek, and NPR prior to that.
Are we done here? Yeah, I’m thinking we are.
No this was to demonstrate that this notion of taxing the pre-tax contributions has been around for a while. That’s what I am getting at. They (Rs and Ds) are trying to figure out how they can sneak this into the tax code before the peasants find out. It’s been going on for a while.
You are making a big mistake thinking that the GOP–the leaders anyway–are not looking at the pre-tax 401k contributions as money that should be taxed. Discussing such a change to the tax code is something that has been discussed in DC for a while and the fact that there hasn’t been one GOP’er pointing to the Dems and saying to the people “they are going to tax your 401K!!” should tell you all you need to know about what the GOP thinks of the idea. Is it in this particular tax plan? Maybe not. Is it something that the GOP is talking about? Probably. Is it something that, if it got put into a future tax plan, the GOP wouldn’t really raise a stink? Most certainly.