Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
S&P SEASONAL ANALYSIS - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the Government Wants to Hijack Your 401(k)

Personal_Finance / Pensions & Retirement Jan 27, 2010 - 05:39 AM GMT

By: Money_Morning

Personal_Finance

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: It's bad enough that we've been forced to bail out Wall Street. But now the Obama administration is hatching plans to raid our retirement savings, too.

To say that I'm "outraged" doesn't come close to describing the emotions I experience every time I think about the government's latest hare-brained scheme.


According to widespread media reports, both the U.S. Treasury Department and the Department of Labor plan are planning to stage a public-comment period before implementing regulations that would require U.S. savers to invest portions of their 401(k) savings plans and Individual Retirement Accounts (IRAs) into annuities or other "steady" payment streams backed by U.S. government bonds.

Folks, there's only one reason these agencies would do such a thing - the nation's creditors think that U.S. government bonds are a bad bet and don't want to buy them anymore. So like a grifter who's down to his last dollar, the administration is hoping to get its hands on our hard-earned savings before the American people realize they've had the wool pulled over their eyes ... once again.

It's easy to understand why.

Facing a $14 trillion fiscal hangover, the Treasury can no longer count countries such as Japan and China to be dependable buyers of U.S. government debt. Not only have those nations dramatically reduced their purchasing of U.S. bonds, most of our largest creditors are now actively diversifying their reserves away from greenback-based investments in favor of other reliable stores of value - like oil, gold and other commodities.

This growing reluctance couldn't come at a worse time. Just yesterday (Tuesday), in fact, the Congressional Budget Office estimated that the U.S. budget deficit would hit $1.35 trillion this year. And that's not the only shortfall the Treasury has to address. The U.S. Federal Reserve is supposed to stop buying Treasury bonds for its asset portfolio, a program the central bank put in place last year.

The upshot: The Obama administration has to find other ways sell government debt - without raising interest rates, a move that would almost certainly jeopardize the country's super-weak economic recovery.

Facing an uphill battle and increasingly skeptical buyers, the government is changing tactics and targeting the biggest pile of money available as a means of dealing with its fiscal follies - the $3.6 trillion sitting in U.S. retirement plans, including 401(k) plans.

The way I see it, the Obama administration can see the financial train wreck that's going to occur. So it's rushing to crack open the safe that holds our retirement money before anyone realizes that they've been robbed.

And if this plan becomes reality, that's just what it will be - robbery. American retail investors didn't sign up for the financial-crisis roller-coaster ride we've been on since 2008. We didn't approve the nation's five-fold increase in lending capacity. And we certainly didn't volunteer to help pay down a national debt that's doubled.

Few people realize that the federal government spent an estimated $17,000 to $25,000 per U.S. household in 2009 (the final figures haven't been calculated, yet). But that's no surprise: "We the people" didn't approve it.

At a point where it's spending money like a drunken sailor, Washington seems more interested in appropriating and redistributing our retirement savings than it is in fixing a system that's badly broken. If you add in all the stimulus spending that the taxpayers must now repay, the average government-agency-spending tab has zoomed more than 50% in the last couple of years. That's right - 50%.

So it's only logical that the administration would go after our 401(k) and IRA savings plans.

Disgusting, but logical.

Here's how the argument is likely to be framed.

The system we presently have in place is what's commonly called a "defined contribution plan." Under such a plan, the benefits we enjoy during retirement aren't determined in advance. Instead, those benefits are determined by how much money we contribute while working, and by the performance of the investments that we choose. The 401(k) is almost exclusively a defined contribution plan.

Years ago, Americans depended more upon "defined benefit plans" that promised a steady stream of income at a future date - with the actual amounts determined by our years of service or our earnings history. Old-fashioned company pension plans and even U.S. Social Security are examples of defined benefit plans.

By laying claim to our retirement assets in exchange for 30-year Treasury bonds, annuities or other payout streams, the government will try to persuade us that we're not capable of managing our own money, that the stock market is too risky a place for most Americans, and that we need Big Brother to hold our hands and protect our futures.

What we need, the administration is going to tell us, is a defined benefit plan.

So expect a big snow job. But here's the problem.

Defined benefit plans are great only as long as they are well funded. Unfortunately, most aren't.

In fact, according to various studies, pension funds could already be underfunded by as much as $5.3 trillion. Add that to the $14 trillion we've already got on the table and we're talking a staggering $19.3 trillion - and that's with no escalators, no cost-of-living adjustments and no interest-rate increases. And that's assuming we don't need another round of stimulus.

Here's what the government isn't going to tell you. When pension funds transition from defined contribution plans to defined benefit plans, the only backing they have is the underlying assets themselves and the company or entity that's responsible for the plans - which in this case would be the U.S. government.

If the prospects of your entire future being placed in the hands of the federal government doesn't scare the daylights out of you after all we've experienced so far, I suspect that nothing will.

Our elected leaders, appointed government guardians, and Wall Street have together demonstrated a total inability to manage what they already control. There's no reason on the planet why they should be allowed to get their hands on our hard-won savings. All that will do is punish the thrifty, disciplined and far-sighted investor, while rewarding - or at the very least protecting - the inept politicians and career bureaucrats who allowed this crisis to occur in the first place.

By backing their plan with 30-year Treasuries, government backers of this plan are betting that you and I won't notice that the trouble with annuities and long bonds is that they tend to get annihilated by inflation. That's why even the most jaded professionals will tell you that investing in such instruments right now when interest rates are being artificially held down near 0.00% is bad juju: Interest rates have only one direction to travel - up, which tends to crush bond prices.

Right now, Americans are apparently smarter than the administration believes. In fact, a survey by the Investment Company Institute found that more than 70% of all households disagreed with the idea of requiring a retiree to buy an annuity with a portion of their assets. And it didn't matter whether the annuity was offered by an insurance company or by the government.

Let's hope that the full-court press that the administration is getting ready to deploy doesn't snow American investors. If the government succeeds, we'll look back and see that they pulled a pretty slick trick to get our support.

Unfortunately, it won't be the last trick they play with our retirement money. That last trick will come after they have control of our savings - when they make our retirements disappear.

Source: http://moneymorning.com/2010/01/27/retirement-plans/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in