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  • October 31, 2008 02:40 PM EDT by Elizabeth MacDonald

    Beware of Congress's Threat to Tax 401Ks

    With the bear market red in the claw, with an equal opportunity bear market taking out solid stocks right and left, with panicked investors feeling like every headline is an explosion, comes this impenetrable stupidity:

    Some Democrats in Congress have held hearings that included discussions of new proposals to tax 401K money. Specifically, the idea would be to eliminate most of the $80 bn in annual tax breaks that 401(k) investors receive. Which means a nearly $80 bn tax hike.

    Heavy Retirement Losses

    The idea to tax 401K funds comes at a time when the Social Security trust fund is deep in the red and investors have lost nearly half of their retirement savings--$2 tn--over the past 15 months, according to the Congressional Budget Office. Retirement accounts known as 401Ks had held nearly $5 tn in savings at the start of the year.

    Democrats are expected to gain seats in both the House and the Senate in the coming election. A filibuster-proof 60-seat majority is a strong possibility in the Senate, which has historically been less receptive than the House to taxing retiree funds.

    In early 1968 President Lyndon Johnson made a change in the budget presentation by including Social Security and all other trust funds in a "unified budget," which effectively let government use Social Security funds for its overall budget needs.

    Gut-clenching Volatility

    The Democrats' move comes as investor fear is rampant, as investors have been experiencing increasing acid reflux ever since the subprime crisis went viral in August 2007.

    Wall Street is witnessing gigantic swings never before seen in the history of the stock market, with the S&P 500 Options Volatility Index (the VIX) repeatedly breaking through the unheard of 80 barrier, twice the 40 levels that were unthinkable even when oil hit $147 a barrel this past summer-making a VIX 50 the new VIX 40.

    Congress's Support of Taxing 401Ks

    House Democrats several weeks ago invited Teresa Ghilarducci, a professor at the New School of Social Research in New York City, to testify before Congress on her plan to eliminate the preferential tax treatment of 401K plans.

    Specifically, Ghilarducci testified before the House Education and Labor Committee, chaired by Rep. George Miller, (D-Calif.), about her plan.

    "We've invested $80 bn into subsidizing this activity," Miller reportedly  said in testimony, referring to tax breaks allowed for 401K contributions and savings.

    With savings rates going down, "what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 bn for a policy that is not generating what we ... say it should?" Miller reportedly said.

    House Education and Labor committee spokesman Aaron Albright emailed to say that the notion that Rep. Miller wants to tax 401K money is "absolutely ridiculous," adding "chairman Miller wants to preserve and strengthen 401K plans, not tax them." 

    Albright noted that the committee has called 11 witnesses, including retirement experts and advisors, over the last couple of weeks to assess the impact of the market's downturn on 401Ks. He added that the committee is looking at disclosure of fees that eat into savings, as well as other measures to strengthen 401Ks.

    Rep. Jim McDermott, (D-Wash.), chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, has reportedly said that since "the savings rate isn't going up for the investment of $80 bn [in 401K tax breaks], we have to start to think about whether or not we want to continue to invest that $80 bn for a policy that's not generating what we now say it should."

    The idea being that, despite their tax-deferred status, 401K funds are not doing much to add to the nation's savings rate.

    Government Data Flawed

    However, the government's measure of the US savings rate does not include stock market gains or real estate gains, which of course have been smacked hard during the credit crisis and economic downturn. And that means the government does not count in its official savings rate the $5 tn that was invested in 401K accounts at the start of the year.

    The Expert's Tax Plan

    The idea is to redirect 401K tax breaks to a new government system of guaranteed retirement accounts into which all US workers would be have to contribute.

    Specifically, under Ghilarducci's plan, the tax breaks on 401K contributions and earnings would be eliminated.

    Instead, all workers would get a $600 annual inflation-adjusted subsidy from the U.S. government. The sum would be inflation-indexed. Workers then would be forced to invest 5% of their pay in a guaranteed retirement account administered by the Social Security Administration.

    That money in turn would then be invested in government bonds that would pay a teensy 3% a year, adjusted for inflation, less than half the inflation-adjusted 7% return the stock market has delivered.

    "I want to stop the federal subsidy of 401Ks," Ghilarducci has said, adding, "401Ks can continue to exist, but they won't have the benefit of the subsidy of the tax break."

    Tax Cuts Set to Expire

    The idea to tax 401K accounts comes as a potential Obama Administration would let the Bush income tax cuts expire across the board.

    That means even small businesses earning less than $250,000 a year would also see their taxes go up. The capital gains and dividend tax rates would also rise as well. Obama might also impose Social Security taxes on a higher level of wages and self-employment income.

    Lower Taxes Help the Deficit?

    As the US applies the paddles to the economy with record bailouts, a member of Congress during a recent hearing posed the question to Federal Reserve Chairman Ben Bernanke whether raising taxes during a downturn as a good idea. Bernanke's answer: No.

    And experts say lower taxes actually help the deficit. Between 2004 and 2007, when the Bush tax cuts were in full flower, the budget deficit narrowed from $413 bn to $162 bn in large part thanks to rapid growth in tax revenue, the Economist Magazine notes.

    This was caused not just by rising incomes, but also by a shift in the distribution of incomes to the wealthy, who pay the highest tax rates, the magazine says. Much of that wealth came from the credit boom which drove up financial profits, salaries and bonuses as well as property and stock values and related capital gains, it adds.

    The US has added the equivalent of the gross domestic product of Great Britain and something like two Canadas and five Saudi Arabias since 2003. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China's economy, Steve Forbes has noted.

    However, Congress has virtually spent the amount in its bid to build a Supersize Me Government, spending that now sits squarely on the backs of taxpayers and entrepreneurs and which does not include the trillions of dollars in extra spending for the housing bailout and the bailout of Wall Street.

    All proof positive that Congress has no more sense than a flock of geese.

     

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Sanda

We're so screwed.

November 10, 2008 at 9:46 am

The Sad Truth Is..

Democratic leaders in the U.S. House discuss confiscating 401(k)s, IRAs... RALEIGH — Democrats in the U.S. House have been conducting hearings on proposals to confiscate workers’ personal retirement accounts — including 401(k)s and IRAs — and convert them to accounts managed by the Social Security Administration.Triggered by ...

November 7, 2008 at 7:44 am

Kathy

My question is this: I am a 52-year old single female and have been paying into SS all my working life (since age 16) and will NEVER see a dime of that money. I am employed full time and in reasonably good health. In mid-September I realized that I couldn't afford to lose any more in my IRA, so I liquidated what little I had left, which would never come close to enough to live off of for even ONE YEAR if I suddenly could not work. At my age, even if I continue to contribute to my 401K at work, I will never ever be able to save enough for retirement. I have until Dec. 14th to roll this IRA money over into some other "qualified - i.e., "government approved" avenue to avoid paying taxes and penalty. I initially considered putting it in T-bills, but now will never put a dime into any government sponsored program. Now I feel the only logical option for me would be to roll it over into short and long-term CDs with my credit union. I would love to cash the check now and tell OSAMA'S Congress to go screw themselves when they come to collect. Can't get blood from a turnip, right?, although I DO own a condo. Can the govt. take that too if I'm living in it? Any advise would be greatly appreciated.

November 6, 2008 at 1:20 pm

Danno

This is typical of liberals, tax anything that moves! the liberals, specifically the Democratic party, will do more harm than G.W. Bush to the ecomomy. Remember, its the Congress that cuts the checks, not the president and we've had a Democrat congress for the last two years. Hold on to your gold fillings, they too may be taxed by the neo-coms.

November 6, 2008 at 10:31 am

Tony

Bob - let's go

November 5, 2008 at 6:34 pm

Patricia

America died 11/4/08

November 5, 2008 at 4:27 pm

Tom

I'm not sure what percentage of American workers have 401k plans but it seems that if Congress wants to get re-elected next time they will not mess with our 401k's

November 5, 2008 at 3:32 pm

Tony

Is the redistribution of income allowed as one of the powers granted to the federal government under the constitution?

November 5, 2008 at 3:08 pm

Mike DiTullio

Pelosi wants to raise the capital gains tax to 100%!!! ONE HUNDRED PERCENT!!!!!! Chew on that little sweetheart for a second!!! If Clinton's Cabinet was a joke what are we getting in three months? Is that PLO professor (Khalidi?) in Chicago going to be Secretary of Defense, Secretary of State, or run homeland security? ...Nice! Ayers going to be Education Secretary ...sweet!

November 5, 2008 at 2:24 pm

Christie

I have spoken at lenght with my parents regarding this very topic. I am 31, make $29,000 a year and have had a 401K for just under two years, contributing 5-7% of my pay on a bi-monthly basis. If I no longer have an incentive to save other than the company match, I will no longer participate in the 401K program and will promptly pull all of my money as well. I don't think you should punish people who are going without to ensure they make the appropriate decisions regarding their retirement. If the current projections hold true, I will be 64 when the Social Security program runs out. I was taught to always be self-sufficient and I am very concerned of the hand-outs the new administration is planning to dole out.

November 5, 2008 at 11:41 am

Cats

When I first heard about this proposal, I almost fell off my chair. If not enough people are contributing to 401(k)'s, start the education process that would help people understand the "miracle of compounding". Don't convert the program to an enforced savings account program backed by Treasury Securities. What a joke.

November 5, 2008 at 11:02 am

Terri

Bob and Tony, I'm with you...let me know how to start and I will start out running. Anyone else out there got the guts to start this?

November 5, 2008 at 9:41 am

Terri

This country is fast moving toward socialism. We the people need to start a grass roots movement to force our government leaders to contribute to social security, pay for their own medical and retirement. Congress is fat on the sweat of middle America and it has to stop. Can anyone tell me how to start this "grass roots" movement? I will be the first on board.

November 5, 2008 at 9:17 am

Kevin Knight

What do they mean that 401k's don't generate the savings that they say it should? I put the max in (15,500) and get a corporate match of around 3k and while the market is down and I'm losing money if I were to get out right now, this is a great program for people that have access to them and safer options exist for the risk averse. BTW, this new mandatory plan they want to force employees to place 5% of salary into, isn't this less than the current 7.65% or so that employees are mandated to pay into social security which is matched by employers? Isn't its goal to provide benefits that social security can't with it's much higher investment? Is the its replacement? How about we let people that don't have access to a plan have alternatives? Wait, we do have that, it's called an IRA as well as other retirement accounts. Hey, maybe we should leave well enough alone. If we reduced the tax burden on folks, maybe more could actually save. I was talking to a European acquaintance a party the other day and he suggested that encouraging savings is bad for the economy... its much better for people to spend rather than save is his opinion... isn't that what dems want? if we save money that they can't touch, why should they let us have it at all? Since most people will never live to receive the money that they and their employers put in the SS system on their behalf and the governemnt can't manage that money and get a decent rate of return, we should let them manage more of our retirement money? I don't think so...

November 4, 2008 at 9:13 pm

Bob

TONY - I'm with you on the Tea Party idea. The problem with conservatives is that we never adopted the tactics of the angry left. When was the last time you saw an angry protest over high government spending or ridiculous taxation? NEVER!!! Well, we need to take it to the streets and engage in a little civil disobedience of our own. I'm ready to crash the doors of Congress when ever you are.....let me know if you're in. STARVE THE BASTARDS

November 4, 2008 at 4:43 pm

Bob

Marxism is coming ......... it's not America anymore. The confiscation of our hard earned 401K retirement funds would be the last straw. Argentina just did this, and I didn't think we looked to Argentina for economic models. Barry O and his pals in Congress, Pelosi and Reid, will be the Axis of Taxes if he is elected. This may sound bad now, but just wait until they are all together doing "what's right for America" and "spreading the wealth". I urge everyone to cash out of all assets, go underground and live off their cash and barter for services. Starve the bastards.

November 4, 2008 at 4:39 pm

Radarnav

If the DEMs in Congress pass this, they will gurantee three things happening in America: 1. The Middle Class will evaporate overnight. 2. The problem of funding future retirements, under this plan, will greatly exceed Congress' current ineptitude with the Baby Boomers (I'm won and don't expect the fantastic Social Security payments) 3. Any smart American citizen will move their savings into personal savings accounts and invest them in tax-free mutual funds to avoid this scheme

November 4, 2008 at 4:30 pm

Rob S

My new plan after the election will be to empty my personal savings, sell all my stocks before the new capital gains tax kicks in and pay the penalty on my 401k and empty it too before I'm taxed on it. Why the hell save anything anymore when the Democrats will take care of my wife and I when I get old. Thank you Obama. Thank you Democrats. I'll sleep much better tonight knowing I'm going to be taken care of in 25 years with taxes that my own children will be paying to cover not only my old age welfare but also the tremendous interest payments on the money you're going to squander on useless programs that benefit only those who either don't work or pay little to nothing.

November 4, 2008 at 3:57 pm

Tod H. Haanes

FELLOW TAXPAYERS - I BELIEVE IT IS TIME FOR A TAX REVOLT!!! Obviously, Congress does not understand where the money is coming from, that is, from hard-working citizens like you and I. Since we are thoroughly disgusted with the fiscal irresponsibility that Congress exhibits, why don't we fight back, and quit paying Federal taxes??? The Government can't put 100 million people in prison. Everyone should join the National Taxpayers Union (i.e. it's free), and we should make a statement to Congress by not paying Federal taxes. Government should be taken over by the Taxpayers of the country! It is time for a second American revolution.

November 4, 2008 at 2:37 pm

PATRICIA MAHANEY

There is an answer vote everyone of the creeps out of office as they come up for re election, spread the wealth, take our 401K's, bankruput the coal companies look out if you own property that will be distributed just to make everyone equal, does this sound like something from the past, possibly China? God help us all if Obama and his bunch is elected, the American people will have no one to blame but themselves for being so STUPID. The world is watching and waiting, the world is jelous of our freedom and our prosperity they can't wait for us to completely fail and Americans will make it happen by a vote, sad, and to think our dads and family members fought and died to keep the dream going. Maybe the country needs another revolution!

November 4, 2008 at 9:28 am

Andy Price

It all comes down to PR. By pandering to the left wing, disenfranchised, huddled masses, the Dems will now have the majority they need in Senate and House, plus White House, to pursue an aggressive change the world agenda. The strategy played out. "You're miserable, we know, we feel your pain and it's all because of all those rich white guys on Wall Street. But don't worry we're gonna get those guys with a big tax hit." These idiot hypocrites just don't realize they're about to kill the golden goose. They'll get theirs, but only when people realize they have no clue, and throw them out, leaving them with only one choice: a new party. This is why an Independent Party will sweep into prominence between now and 2012. Led by someone like Bloomberg. Andy Price Marin County, CA

November 3, 2008 at 6:39 pm

Tony

We were encouraged to put our money into these 401Ks. Now that there's a big pot of money there, the gov't wants it. Talk about double dealing. Wait for the next shoe - incentive stock options. I work for a small technology company where ALL the workers get ISOs. These ISOs help to compensate for the fact that small companies don't have the cash to pay market rates on compensation. The package is a competitive (but at the low end) salary plus ISOs to make up the difference. The thought being that when the company either goes public or gets bought, the employees that sacrificed compensation, get reimbursed with the gains on their ISOs. In many cases, to mitigate the risk, the ISOs aren't exercised until the event (IPO or buyout) is about to happen, thus making all the gain short term. With the new tax plan to be introduced this will be taxed at very high marginal tax rates. In effect, making them worthless and negating the sacrifice of many employees. This will kill ISOs for small technology companies, making it very difficult for them to get the talent needed. Talk about disincentive. I see no hope for anyone ever climbing the economic ladder. Do you think Bill Gates made his money on salary alone? Time for another Tea Party.

November 3, 2008 at 6:13 pm

Glen B

People - please watch the Cavuto interview and see what George Miller is really saying. He has no plans to eliminate the tax breaks for 401(k) plans, regardless of what Ghilarducci is recommending. Don't believe everything (or should I saying anything) you hear on FOX without doing some research on your own. George Miller has been advocating for fee disclosure for 401(k) participants and trying to get more people saving for retirement. If this measure ever comes up before Congress, I would advise everyone to write to their senators/representatives and let them know it's a bad idea. A similar bill was attempted in the 80's and because of the number of letters written by concerned Americans, it went nowhere! Complaining on a blog doesn't help the cause - do something!

November 3, 2008 at 4:28 pm

Bill

Eric Friese is exactly right. Like I said in an earlier post, the only money you will EVER see is the $600 tax break. When you go to get your invested money out, there won't be any - just like social security.

November 3, 2008 at 3:58 pm

K. Ross

This proves that the democrats are incredibly stupid or horribly malicious. I am going to take every penny I have invested in my IRA’s, 401K’s and other stocks out, place it in a zinc can and bury it in a remote national forest. That way I will feel like I’m giving money to the government but they won’t know where it is and I will still have access. Or! I could become a democrat and worm my way to elitehood with the rest of them. The great saviors of freedom who know better what to do with my income than I. As Steve Martin once said; “got fifteen hundred? Give it to me, I will put it in Steve’s bank. Right here in my pocket.”

November 3, 2008 at 12:27 pm

about this blog

  • Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.

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