House Democrats Contemplate Abolishing 401(k) Tax Breaks

[Dumpy Dooby]

House Democrats Contemplate Abolishing 401(k) Tax Breaks
By Sara Hansard | October 16, 2008

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.

[Source: http://www.workforce.com/section/00/...e/25/83/58.php]

Like Diesel mentioned on another forum, it's now clear how they plan on paying for the off-budget long-term SSI debt: force everyone to buy government bonds instead of investing in the stockmarket.

Considering that Democrats have a 60-seat Senate, 218-seat House, and Messiah is on the way, this should be interesting.

Another interesting tidbit that I've mentioned before, but will mention again for those that missed it: A 401K is a DBO. The government owns it outright, and you are merely a beneficiary of that account. How's that feel?

[Swift]

instead of cutting say, THEIR pentions, they want to get rid of and possibly nationalize the 401K benifits? And what's worse, the reason they wanted to do this was creted by them? yeah, very cute.

Man, this is so ridiculous. Can we fire every single person in conbress and start over again?

[Rouger2]

What would the stock market look like without all those billions of dollars going into it every month from 401k plans. There would be so much less money for the hard ballers to play around with. It would be one hell of a change. I think that if you buy a stock you should have to own it for at least a year it would keep the dam thing from being just a gamblers paradise. People would be more careful about the stocks they bought and maybe care about the company they bought into.

[motivez]

I don't think it'll happen, but it sounds like a stupid idea. People should be rewarded for saving their own money by investing in our markets.

[Stylerod]

Wow, that would be really, really bad.

[Photon1001]

Originally Posted by motivez

I don't think it'll happen, but it sounds like a stupid idea. People should be rewarded for saving their own money by investing in our markets.

Why should investing in our markets deserve such merit? Are these markets of ours somehow successful or something?

[WickedLou9]

that bullshit would never happen.

[Swift]

Originally Posted by Photon1001

Why should investing in our markets deserve such merit? Are these markets of ours somehow successful or something?

I'm hoping to God you are kidding.

[Heres Johnny]

And McCain wants to tax you flex pay, too. My question on the 401K is will this effect everybody with a 401K, or is there an upper limit that is going to be effected?

[Dumpy Dooby]

Originally Posted by Heres Johnny

And McCain wants to tax you flex pay, too.

How is that relevant to this discussion? McCain is a Senator, not a House Rep, and last I check that doesn't absolve the Representatives of their deficiencies.

My question on the 401K is will this effect everybody with a 401K, or is there an upper limit that is going to be effected?

Everybody.

[Heres Johnny]

Well, if either one is true, then we loose money. Money is always relevant. Especially when it comes to politicians.
Is there an upper limit. Is there a lower limit. will the 401K work like a ROTH and releave you on the back side?
Another words, if this is true, what else do we know about the proposal? Is this more lies through omission on the part of McCain's camp? I'm just seeking answers.

[HughRuss]

Originally Posted by Heres Johnny

will the 401K work like a ROTH and releave you on the back side?

That's what she wants.

[Heres Johnny]

Hey if it worked like a ROTH, that'd be cool. You can take back your investment amount without being penalized. Sounds good to me. The feds get a little revenue while we're really hurting, but we get it back 10 fold in the future. Who's she... Pelosi?

[A_C_E]

It's an awful idea. It came up at a recent House Ways and Means Committee hearing, but Chairman Rangel doesn't seem to support it.

Without Rangel, it doesn't pass. And I hope to god it doesn't.

[HughRuss]

Originally Posted by A_C_E

It's an awful idea. It came up at a recent House Ways and Means Committee hearing, but Chairman Rangel doesn't seem to support it.

Without Rangel, it doesn't pass. And I hope to god it doesn't.

Come on, don't you have some political clout? At least lobby on our behalf.

Rape a puppy for Rangel, or something.

[A_C_E]

Originally Posted by HughRuss

Come on, don't you have some political clout? At least lobby on our behalf.

Rape a puppy for Rangel, or something.

Haha, I wouldn't go that far. My bosses are major heavy-hitters, I'm just an underling.

In all seriousness though, I really doubt this is going to get through. House Repubs are virtually unanimous in opposing, and for something like this to get through, you're going to need a big majority of the Ways and Means Committee to stand behind it. At this point I just can't see that happening; McDermott is an outlier. People like Rangel, Stark, Levin, McNulty, Neal, Larson, Emanuel, Pascrell, Van Hollen, Crowley, and Schwartz are ALL going to have to support it.

I have an exceedingly hard time believing that's going to happen.

[A_C_E]

wtf double post

[Swift]

It angers me that this would even be an option. Why is it that when the government needs money they look to get more cash first and cut programs/spending never?

[DosEquis]

Originally Posted by Swift-Bass

It angers me that this would even be an option. Why is it that when the government needs money they look to get more cash first and cut programs/spending never?

They suffer from "not in my district". They all campaign to go cut spending but those spending cuts correlate to a congressional district or state some place.

For example if they decide to cancel something like the Commanche helicopter, thats X number of decent paying jobs that are going to be gone from a community. That congressman has to answer why unemployment is going up and he is not doing anything on the federal level.

If you insert any spending example in there, it generally works out that way.

[Swift]

Originally Posted by DosEquis

They suffer from "not in my district". They all campaign to go cut spending but those spending cuts correlate to a congressional district or state some place.

For example if they decide to cancel something like the Commanche helicopter, thats X number of decent paying jobs that are going to be gone from a community. That congressman has to answer why unemployment is going up and he is not doing anything on the federal level.

If you insert any spending example in there, it generally works out that way.

Yeah, that's rough. It can be very rough for a particular community. But if we're ever going to get out of the whole that we're in, how can we do it by taxing more AND spending more?