House Democrats Contemplate Abolishing 401(k) Tax Breaks

[peejay 327]

House Democrats Contemplate Abolishing 401(k) Tax Breaks

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.

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October 16, 2008

House Democrats Contemplate Abolishing 401(k) Tax Breaks

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.

http://www.workforce.com/section/00/article/25/83/58.php

[dalegg 143]

No way they do that now. 401Ks are like the only investments that people aren't really thinking about pulling out or the market now. Do this and its 1929.

[peejay 327]

Little do the younger set realize what Dims are all about. It's been a long time since they have been able to show their true colors. These people derive their power by making you dependent on them to control and manage your life for you. The key word here is "dependent" rather than "independent". And people fear "change" when they become accustomed to being dependent. That dependency is hard to break and that's just the way they want it. Forcing you to give them your money and then you have to depend on them to get it back. Groovy! Carry on America. It's a brand new world!

[Sofiyya 1,687]

Little do the younger set realize what Dims are all about. It's been a long time since they have been able to show their true colors. These people derive their power by making you dependent on them to control and manage your life for you. The key word here is "dependent" rather than "independent". And people fear "change" when they become accustomed to being dependent. That dependency is hard to break and that's just the way they want it. Forcing you to give them your money and then you have to depend on them to get it back. Groovy! Carry on America. It's a brand new world!

Word! Some here make fun of "old" people, but they will get old fast under a totally ** regime.

I got mine, young skulls full of mush. You've got yours to get, and your devotion to the Dims will make that so much harder!

[Danno 1,228]

*Change we can believe in*

[William33 110]

No way they do that now. 401Ks are like the only investments that people aren't really thinking about pulling out or the market now. Do this and its 1929.

More like 1829, when people saved money under their bedroom floor.

[rebeccajo 14]

This was testimony only by an expert before a House committee. It wasn't even close to "law makin'".

[Mr. Big Dog 10,747]

This was testimony only by an expert before a House committee. It wasn't even close to "law makin'".

You're missing the point:

[Pooky 3,877]

This was testimony only by an expert before a House committee. It wasn't even close to "law makin'".

You're missing the point:

Just because they want to make you afraid doesn't mean you shouldn't be afraid anyway.

What Congress thinks about today and talks about tomorrow has every chance of being "debated" and passed next week, regardless of whether it is reasonable, sensible, or even remotely popular.

[NickD 203]

This was testimony only by an expert before a House committee. It wasn't even close to "law makin'".

You're missing the point:

Just because they want to make you afraid doesn't mean you shouldn't be afraid anyway.

What Congress thinks about today and talks about tomorrow has every chance of being "debated" and passed next week, regardless of whether it is reasonable, sensible, or even remotely popular.

First off, there isn't any 401K tax breaks, you either pay now or later, second, did any of you take the time to check this OPer's source and verify with other sources? Too tired to do it tonight, but sounds like more republican party BS to me. Already upset about our 401K under George W. Bush, instead of making money, we lost 20% because of this Wall Street BS.

People that do not bother to check things out first, deserve what they get, and we sure got it the last eight years. How can you defend something like that?

[Sofiyya 1,687]

Barney Frank would disagree with you.

[William33 110]

Didn't enjoy your economics classes? Clearly, one will benefit from pre-tax investment benefits in a 401 scheme. Agreed that income tax rates may change, yet the retirement benefits will not, irrespective of the future administration. These programs will remain static. No current or future US administration is stupid enough to gamble these benefits.

[one...two...tree 2,762]

It would be stupid idea to even entertain, but the OP is misleading to suggest that the House Democrats are even contemplating. I imagine that a lot of proposals are brought up and quickly dismissed.

[MrsCat 6]

Oh no - poor Suze Orman is going to have to rewrite all of her books and make readers buy new ones.

Hmmmmmmmm - sounds like the Suze lobbied government to make changes so that people need new advice. Blame the lesbian.

[NickD 203]

All, I am going to say is that, "House Democrats Contemplate Abolishing 401(k) Tax Breaks" is all over the net, has been modified from it's original form, not going to refute it, not going to show sources, you can do that yourself.

Just amazes me how this ####### is spread around, and amazes me even more that people pass it around and believe it! But hey, it works, giving us leaders that are literally destroying our country.