Why I Have No 401(k)

When Americans drag their way in to work on a gloomy Monday morning, for many there is one ray of hope and light that keeps them from abject misery: Retirement!

Throughout the living memory of almost all of us, those who make it successfully to old age can count on a period of "golden years" in which they have enough health to still have fun - to travel, to pursue hobbies, and so on - and also enough money with which to do it, before spending their final dotage in a nursing home.  Ever since the New Deal and Social Security, American culture has embraced the assumption of a reasonably comfortable retirement for most people.

Of course, Social Security was never really intended to accomplish this all by itself, nor did it have to.  From the 1950s through the 1980s, private pensions were provided to most workers, storing up a lifetime of work to provide for an indeterminate old age.  For every unlucky worker who died before retirement, there was a more long-lived one who enjoyed ten, twenty, even thirty years in which to collect their pension.

This gets expensive, and the last ten years have been filled with news of companies ending pension plans in bankruptcy, other plans closed to new workers, and lifetime employees suddenly left with far less than they'd counted on.  But what can you expect when you trust someone else with your money?  Isn't it wiser to be personally responsible for your own savings?

Enter the 401(k), now the retirement vehicle of choice for today's middle-aged.  The idea behind the 401(k), named after the clause of the tax code that created it, is simple: you don't have to pay taxes on any money you put into it.  You only have to pay taxes when you take the money out in your old age - presumably much more money after many years of compounding, and at a lower tax rate since you aren't working anymore.  Set aside a small portion of your salary each week, and after four decades of working and waiting, your 401(k) will be enormous, well prepared to meet your every need.

And this has actually worked fairly well for a lot of people, the recent stock-market crashes aside.  However, just now there are an awful lot of ordinary Americans who have lost half or more of their wealth and are now looking at a much poorer or longer-delayed retirement than they'd anticipated just last year.

In other news, year-end brings the time when individuals must decide whether or not to participate in their employer's 401(k) for the following year.  And I have been wrestling with this question.

On the face of it, it should be a no-brainer.  Setting money aside for the future is prudent; avoiding taxes is always wise; and many companies even offer matching funds to encourage participation.  Free money?  Why not?

There is a significant downside to the 401(k) which has been ignored from its inception.  No, it's not the risk of an investment loss; that risk is there whether you own stocks via a 401(k), an ordinary investment account, or even old-fashioned stock certificates.  The 401(k) carries with it a special risk all its own which is only now coming to light.

Because, according to its rules, once you put money in there, it is trapped until you are old.  The reason government allows you to skip paying taxes on your savings is because it wants to encourage old-age savings.  If you take out the money when you aren't yet old, you're defeating the purpose.

Now, since the money is yours, you can't actually be completely prohibited from doing so; but barring a provable financial disaster in your life like disability, any early 401(k) withdrawals are whacked with an instant confiscatory tax rate.  You might as well leave the money in; if you take it out early, the IRS steals practically all of it.

This means that whenever you make a contribution to your 401(k), you are making a gamble, just as surely as if you put the money on a roulette number.  You are gambling that the government will keep its word and leave the 401(k) structure as it is until you reach the age where you can take your own money out without penalty.

Why should we be worried about this?  Because there is an awful lot of money stored up in 401(k)s - even after the crash - and our new administration is looking for money under the mattresses just now.  According to US News & World Report:

House Democrats recently invited Teresa Ghilarducci, a professor at the New School of Social Research, to testify before a subcommittee on her idea to eliminate the preferential tax treatment of the popular retirement plans. In place of 401(k) plans, she would have workers transfer their dough into government-created "guaranteed retirement accounts" for every worker. The government would deposit $600 (inflation indexed) every year into the GRAs. Each worker would also have to save 5 percent of pay into the accounts, to which the government would pay a measly 3 percent return. Rep. Jim McDermott, a Democrat from Washington and chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, said that since "the savings rate isn't going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should." [emphasis added]

Prof. Ghilarducci, invited to promote her ideas to Democrats, is explicitly advocating the confiscation of all existing 401(k) plans.  The whole point of the 401(k) is that it belongs to you, and you control what it's invested in.  The Professor's proposal would have these accounts forcibly transferred to the government, all workers required to contribute to them, and the government giving a specific, guaranteed, fixed 3% return - a rate of return barely above inflation, which amounts to no return at all.

What do you suppose the government would do with this windfall?  At the best, they would invest it elsewhere and pocket the difference, a tax increase by hidden means.  It's far more likely that our retirement money would be used in the same way as all the social security money - it would be spent to fund the programs Mr. Obama wants to do but can't find money for, such as universal health care.

If you have money in your 401(k), there is not a darn thing you can do about it.  Your money is trapped there; you cannot remove it.  It is entirely at the mercy of Congress.

As Rep. McDermott (D, WA) makes clear, Congress does not view "your" 401(k) to be "yours" at all, it's a gift from the government and they can take it back at any time.  He considers the tax-deferred status of retirement accounts to be a government "investment" which can be liquidated if it isn't having the desired effect.

Is a tax break an "investment?"  Not hardly - how is letting you keep more of what you earn an investment on the part of the government?

This is the same fallacy that we see so often when Democrats complain of "wasting" money on tax cuts - they talk as if all the money belongs to the government in the first place, and whatever funds you are graciously permitted to keep is a generous governmental expense!  That attitude is the foundation of socialism, if not Communism.  The sanctity of private property, in contrast, is the first rule of freedom, free enterprise, and capitalism.

We've previously noted that more young people believe in extraterrestrial aliens than think they'll ever be able to retire.  It's not that they don't want to; they just don't think they will be able to afford to.

This fear should be driving people to save more in their 401(k) - but, just possibly, I am not the only one with more serious worries there.  Do I have the confidence that government will leave my 401(k) money alone for the next three or more decades?  Not on your life!

Instead, I'll be doing other things with the money.  Where will I invest or spend it?  Who knows?

But one thing I do know: wherever it's put, it'll be somewhere where, if necessary, it can be moved around - including offshore should the circumstances dictate.  And until such time as Democratic leaders in Congress forcefully repudiate any desire to mess with existing 401(k) law, for darn sure I'll be deeply reluctant to invest in the stock market under any circumstances.

Because this theft scheme isn't original with Prof. Ghilarducci.  Just this past October, Argentina confiscated private pension plan funds.  This means, among other things, that the investment decisions will be made by politicians and their appointees, not noted for their financial acumen.  It should come as no surprise that, as AFP reported:

The Argentine stock market plummeted another 11 percent Tuesday in reaction to the announcement, as the private pension funds strongly criticized the measure as a "short-term" move and insisted that their assets remained healthy.

"The market was shattered by the drastic change to the rules of the game concerning the pensions. It amounts to a confiscation of private capital," said stockbroker Luis Corsiglia.  [emphasis added]

Why, yes, indeed it does amount to confiscation of private capital - and private capital knows it.  Money moves around the world at the speed of light; it can outrun legislators creating new taxes.

Our stock market has fallen a long way, but there's certainly plenty of room for it to fall more if the government starts confiscating investments.  America does not need to become like Argentina - but I'm not betting my money that it won't.