Good Morning Gentle Readers,
This persistent rumor has again triggered a flurry of rank hyperbole in emails, Facebook posts, and blog posts circulating around teh intertubes claiming that President Obama and/or Those Good-For-Nothing Democrats plan to nationalize your private retirement plan in order to shore up the failing socialist security system.
To bolster the charge, critics point at Argentina, where the citizenry was apparently too preoccupied with Malbec to notice that the government nationalized their private retirement plans in late 2008. They'll need that wine now.
BUT! And this is an important difference: The Argentinian private retirement plans were not the equivalent of IRA's or 401(k) plans. Argentina experimented with a plan allowing workers to choose between the government equivalent of America's Social Security system or a privately administered retirement program. Workers either paid into the tax-supported government system as we Americans pay into social security, or, they could opt out of the government system for a mandatory private system. Argentina simply ended the mandatory, private retirement program and moved those assets to the government system.
Critics (including moi) pointed out that this move was a cash grab by Cristina Kirchner's Peronista government that swapped immediate cash for the promise of government guaranteed retirement benefits to be paid later.
The origins of the story come from the testimony of Teresa Ghilarducci, professor of economic
policy analysis at the New School for Social Research in New York, in hearings
Oct. 7, 2007. Testifying before the House Committee
on Education and Labor, Ghilarducci
proposed that the government eliminate tax breaks for 401(k) and similar
retirement accounts, such as IRAs, confiscate workers’ retirement plan
accounts, and convert them to universal
Guaranteed Retirement Accounts (GRAs)
managed by the Social Security Administration.
Whole thing here or here.
Is there cause for alarm? To be sure, it's troubling that Ms Ghilarducci, who advocates nationalizing all private retirement plans, was invited by several key Democrats to testify at the hearing back in 2007. However, representatives from Heritage Foundation, a strong free market advocate and proponent of private retirement plans, also testified (along with a broad spectrum of other analysts).
Going forward, if the US becomes Argentina, then maybe
you have something to worry about. However, I would submit that you’d already
be in a world of financial hurt long before a Peronista-inspired seizure of your IRA took place.
What may very well happen is point nine in my Election Day
Forecast here. Incidentally, eight out of nine musings from TWC's crystal ball were on the money. The final prediction, that social security will become a means tested welfare program for old people, will come to pass as well. Just not for a while.
The primary reason that the federales won't nationalize your retirement plan is that it will be
much easier to sell the public on Social Security retirement as a social
welfare program for the elderly indigent. You keep your 401(k) but you don't get Social Security benefits.
The secondary reason that the federales won't nationalize your retirement plan is that it would
be politically difficult to seize retirement plans. It might be easier
than sending troops door to door to confiscate guns and ammunition, but it would create every bit as much
outrage.
The current administration actually proposed mandatory retirement accounts for those whose employers don't offer them. These accounts would presumably be administered by the Social Security Administration. They would purportedly remove all risk from investing for the future in the same way that Social Security does. Rick Henderson explains reality for us.....
There is, of course, no real economic relationship between the (Social Security) taxes working people pay and the benefits they collect as retirees. Both are simply set politically, giving all retirees a vested interest in the welfare state
Further, even considering the financial uncertainty of markets (including the recent meltdown), Social Security offers a very poor return on investment. In some cases, less than one percent. Calculate your own Social Security ROI here. There is every reason to believe that the proposed government-provided retirement program will provide similar results over time.
Economic reality dictates that Social Security isn't sustainable. If it does not become a means tested program, benefits will be cut dramatically and taxes to support the program will be increased just as dramatically. If you have other retirement income, your benefits will be reduced according to some arbitrary formula and the wealthy
will be out of luck entirely. They don’t need it anyway (there’s your easy
sell).
In the end, imposing means testing for social security benefits accomplishes the same end as nationalizing 401(k) plans, without the nasty political blowback that would result from the seizure of
private accounts.
We Report. You Decipher.
As Ever,
TWC
Portions of this post appeared in early November of 2008. It has been edited and updated.
Tip of the glass to Linda T