Skip to comments.House Democrats Contemplate Abolishing 401(k) Tax Breaks
Posted on 10/22/2008 11:59:13 AM PDT by ncfool
House Democrats Contemplate Abolishing 401(k) Tax Breaks Powerful House Democrats are eyeing proposals to overhaul the nations $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 Committees 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 Millers 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 Ghilarduccis 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 wont 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 nations 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 Ghilarduccis plan at the hearing last week, he was clearly against continuing tax breaks as they currently exist.
Savings rate The savings rate isnt 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 thats not generating what we now say it should.
From where I sit thats 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. Belluardos 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 doesnt 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.
Lead by Nancy Pelosi the congress is now the socialist party of America.
Think about how millions of employees are invested in 401K plans and the impact this would have again on the national financial markets.
Why is the dow down again today 400+ points it because of the Democrats trying to destroy the American Capital market.
We need to rise up and vote against any rat running for office.
Sine all union members have this benefit, how is it they are supporting the very people who are going to take their money away? This makes no sense at all, why on earth would a union or union member support this party?
How much you want to bet that Democrats have their eye on eliminating the Roth IRA?
Just a whiff of this possiblity will tank all the markets down a permanent 50%.
Democrats are proving once and for all that they are the enemy within. Time to fight.
It’s tax deferred savings. When you retire and tap the account you pay the taxes then. Remove the benefit and people will stop saving and companies will stop matching.
Of course if we had a fair tax system of say 15-17% on eveyone then we wouldn’t need all of these various incentives.
“Yeah, I know you all put money in the Roth IRA based on the promise of tax free gains, but, we want that money, so we’re just going to do like we always do,
and change the rules after the game has been played.”
They seem to ignore we already contribute to a retirement system for all workers and we are forced to contribute to it.
Dumb ass journalist, never thought about asking that? It’s called SOCIAL SECURITY and a little over 12% of our earnings are taken to go towards that (6% ours, 6% employers’ budget for us).
This is bullsh1t. Utter bullsh1t. They’re trying to kill off private investment ability and take down businesses all at the same time.
The Red Revolution in the USA (to make us the USSA) is now underway. Guess that makes us the white army. Hopefully we do better than the Russian white army did.
If it moves, tax it.
If it's stationary, confiscate it.
McCain/Palin should address this infantile brain storm.
The left is simply not fit to lead.
The Democrats are looking for a way to save social security. If they can redirect your 401K contributions to another government controlled program, they can avoid painful changes to social security. This will be just a stealth payroll tax that funds social security and other government programs.
There is no doubt that the ERISSA law governing 401ks needs revision. It needs revision to give employees more control of their money, not less control.
Down 380 points right now. Thanks Nancy Pelosi and the Rat party!
Private Retirement accounts should be just as dangerous a 3rd rail for politicians to touch as SS.
Then send the link to all your friends on your email list........
IMHO, it's a ruse to fund SS...that's how I see it. It has nothing to do with the tax deferral issue...they need more money to fund SS and this account would be administered by SS.
Do it. Destroy the retirement of most of america’s working middle class. I dare ya.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.