House Democrats Contemplate Abolishing 401(k) Tax Breaks

[5711-Marine]

October 16, 2008
House Democrats Contemplate Abolishing 401(k) Tax Breaks
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.

A plan by Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York, contains elements that are being considered. She testified last week before Miller’s Education and Labor Committee on her proposal.

At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months.

Under Ghilarducci’s 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.

“I want to stop the federal subsidy of 401(k)s,” Ghilarducci said in an interview. “401(k)s can continue to exist, but they won’t have the benefit of the subsidy of the tax break.”

Under the current 401(k) system, investors are charged relatively high retail fees, Ghilarducci said.

“I want to spend our nation’s dollar for retirement security better. Everybody would now be covered” if the plan were adopted, Ghilarducci said.

She has been in contact with Miller and McDermott about her plan, and they are interested in pursuing it, she said.

“This [plan] certainly is intriguing,” said Mike DeCesare, press secretary for McDermott.

“That is part of the discussion,” he said.

While Miller stopped short of calling for Ghilarducci’s plan at the hearing last week, he was clearly against continuing tax breaks as they currently exist.

Savings rate
“The savings rate isn’t going up for the investment of $80 billion,” he said. “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.”

“From where I sit that’s just crazy,” said John Belluardo, president of Stewardship Financial Services Inc. in Tarrytown, New York. “A lot of people contribute to their 401(k)s because of the match of the employer,” he said. Belluardo’s firm does not manage assets directly.

Higher-income employers provide matching funds to employee plans so that they can qualify for tax benefits for their own defined-contribution plans, he said.

“If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets,” Belluardo said.

“This is a battle between liberalism and conservatism,” said Christopher Van Slyke, a partner in the La Jolla, California, advisory firm Trovena, which manages $400 million. “People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny,” he said.

The Profit Sharing/401(k) Council of America in Chicago, which represents employers that sponsor defined-contribution plans, is “staunchly committed to keeping the employee benefit system in America voluntary,” said Ed Ferrigno, vice president in the Washington office.

“Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system,” he said.

No legislative proposals have been introduced and Congress is out of session until next year.

However, most political observers believe that Democrats are poised to gain seats in both the House and the Senate, so comments made by the mostly Democratic members who attended the hearing could be a harbinger of things to come.

Advice at issue
In addition to tax breaks for 401(k)s, the issue of allowing investment advisors to provide advice for 401(k) plans was also addressed at the hearing. Rep. Robert Andrews, D-New Jersey, was critical of Department of Labor proposals made in August that would allow advisors to give individual advice if the advice was generated using a computer model.

Andrews characterized the proposals as “loopholes” and said that investment advice should not be given by advisors who have a direct interest in the sale of financial products.

The Pension Protection Act of 2006 contains provisions making it easier for investment advisors to give individualized counseling to 401(k) holders.

“In retrospect that doesn’t seem like such a good idea to me,” Andrews said. “This is an issue I think we have to revisit. I frankly think that the compromise we struck in 2006 is not terribly workable or wise,” he said.

On Thursday, October 9, the Department of Labor hastily scheduled a public hearing on the issue in Washington for Tuesday, October 21.

The agency does not frequently hold public hearings on its proposals.

Filed by Sara Hansard of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

[5711-Marine]

Link to her plan

[billamj]

This is NOT good. Talk about taking people's money, let's attack money that is supposed to support the people when they retire. That way they can become more dependent on the government.

[ALS]

They need a new Slush Fund since they Bankrupted Social Security and Medicare. This is all about there being no money starting in the next 6 years to pay the new retires their SSI checks. Guys get ready for at least another
7 to 10% added to your payroll taxes. So if they are now taking 28% out of your paycheck in taxes you can look forward to 35% to 38% coming out in the next five years. Go luck being able to buy anything once that starts.
Because every business is going to jack up their prices to cover the new payroll taxes.

Remember the Bush tax cuts? Well they expire 12/31/2010.
Figure on at least another $2500 sucked out of your paycheck each year on top of any new Democrat tax hikes. So add in an instant 5% increase in your payroll taxes on 1/1/2011.

Also don't forget how the Democrats are so eager to raise gasoline taxes.
I figure on a .50 cent increase by June of 09.

[LittleRedToyota]

i don't think anyone is ultimately going to take her plan seriously.

it's so fundamentally flawed, it isn't even funny. and the entire retirement industry knows that and will oppose it--with a lot of lobbying...and they are a fairly powerful lobby.

[5711-Marine]

i don't think anyone is ultimately going to take her plan seriously.

it's so fundamentally flawed, it isn't even funny. and the entire retirement industry knows that and will oppose it--with a lot of lobbying...and they are a fairly powerful lobby.

But there will be no lobbyists in an Obama Administration...

[LittleRedToyota]

But there will be no lobbyists in an Obama Administration...

LOL...yeah, right. i assume you were kidding, though...so, good one.

at any rate, it won't be up to obama...it is up to congress...and there will continue to be lots o' lobbying in congress...

(going off topic a bit...it cracks me up how both major candidates, but obama moreso, keep saying "as president, i'll..." and then go on to list a whole bunch of things that only congress can actually do...)

[5711-Marine]

LOL...yeah, right. i assume you were kidding, though...so, good one.

at any rate, it won't be up to obama...it is up to congress...and there will continue to be lots o' lobbying in congress...

(going off topic a bit...it cracks me up how both major candidates, but obama moreso, keep saying "as president, i'll..." and then go on to list a whole bunch of things that only congress can actually do...)

yes I tried italics to indicate sarcasm.

I agree with regard to the promises which the President can not fulfill. My favorite one is "pay teachers more" which is a local government issue through the local school board...

[Brick]

Sheesh, the Dems spent years screwing up the Social Security System and now they want to repair the damage by stealing the 401K accounts that individual citizens have set up and paid for! I think they've stolen enough!

[Morel42]

Hrmmm..

Okay lets see here.. Social Security as we know it will end in about 6-10 years.. Thats a known fact so something has to change. Obviously going the route of privatizing the system would be a disaster..

It's a matter of different outlooks.. Some view Free Market and "let people provide for their own future retirement even if it means they fall on their faces" as the way to go.. Some think that security after retirement is too important to risk on anything but Gov't controlled and regulated systems that guarentee a basic level of income, but lacks individual control..

One system allows for greater personal wealth, but carries risk of huge losses..

The other system carries no risk, but forces people to pay into the system without the chance of winning it big..

Each system has it's own merits and pitfalls.. However the problem is that people assume the worse of the intentions of each side. Some think that everyone who wants the gov't system just wants control and wants to "give a handout", while the truth is that these people view (honestly, if misguided) Gov't as the only organization that can absolutely guarentee people have the ability to live after retirement.

The other side views allowing people to control their destiny as the best way, and that any gov't programs are huge waste of money, and incourages laziness and the nanny state..

Both sides have good points. We need to stop fing calling each other names, and come up with a system that has the benifits of BOTH sides.. You can have a minimum safety net, while allowing people who wish so to invest more then the basic amount.. Clear up and simplify financial researching, systems, and provide transparency in a system that has simply gotten to complex for even experts to understand what is going on.