Concern about Guaranteed Retirement Accts

[supalong52]

I also posted this on Bogleheads, but wanted some feedback from you guys.

I recently read about guaranteed retirement accounts, which proposes to convert existing and future 401(k) and IRA accounts into a government managed annuity. Basically, it's a forced distribution of wealth that extends the already failing social security system. To make matters worse, you can't pass it on to heirs like 401(k)/IRA accounts. Congress apparently had another hearing about it a few days ago -- do a google search. Now, I've always considered myself liberal, but if this were to become law, I would never vote democrat again.

What do you guys think? Am I overreacting? Misunderstanding?

 

[haha]

This is the first I have heard about this. But here is a summary of some main points:

• Employees would make mandatory contributions equal to at least 5 percent of their earnings. Workers could contribute higher amounts if they wish.
• Those contributions would be offset by a $600 federal tax credit each participant would receive.
• As with a 401(k) plan, workers would have individual accounts they could track. The balance of each account would depend on each worker's contributions and income level.
• The Social Security Administration would handle account management, and the Thrift Savings Plan -- a well-regarded retirement plan for federal employees -- would manage the money.
• Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent. For instance, if inflation stood at 2 percent, the worker would earn 5 percent; if inflation reached 3.5 percent, the worker would earn 6.5 percent. Participants could receive an inflation-beating return above 3 percent if the government's investment returns were high enough.

At retirement, participants' account balances would be converted into a lifetime stream of income that adjusts for inflation. There would be options to take partial lump sum payments, opt for lower payments in return for survivor benefits and, upon death, leave a portion of a financial account balance.

To me this sounds like a very good idea. Most people will screw up their retirement accounts either by insufficient contributions, or by poor investment choices. This will protect solvent, prudent people from having to pick up their checks. Also, the investment vehicle is extremely generous- compare it to TIPS! Any more adventurous investing that one wants to do could be done in taxable accounts.

I doubt they would try to force annuitization of current retirees' IRAs and Roths, and if they did try I doubt it would succeed, but if it did the annuity terms are at least very attractive!

Nevertheless, it's never a bad time to desert the Dems.

Ha

 

[zinger1457]

I'm not aware of any plans that would make the use of guaranteed retirement accounts mandatory, it would be voluntary, just another option in retirement savings and funds distribution. Of course some of the right wing blogs have jumped on this as a government plan to take over IRA/401K plans.

 

[FinanceDude]

I'm not aware of any plans that would make the use of guaranteed retirement accounts mandatory, it would be voluntary, just another option in retirement savings and funds distribution. Of course some of the right wing blogs have jumped on this as a government plan to take over IRA/401K plans.

There have been a number of hearings in the past year about an idea to get rid of 401K's............

 

[kyounge1956]

I think this is the same plan that was discussed on several threads about a year ago. Try this one, this one, this one or search for Ghilarducci (the name of the economics professor behind the idea) on E-R or elsewhere. I would need to do some more searching but I do not recall that the plan included conversion of existing 401k or IRA balances to GRA's. I got the impression that the plan would substitute the GRA for 401ks going forward. I'm not fond of the idea in any case, but I'd be even more opposed if my existing 457 and Roth IRA balances, which I can access at age 59-1/2 or even earlier via a 72(t), were converted into a GRA, which I couldn't draw on until I'm 62!

 

[MasterBlaster]

Fool me Twice - Shame on Me

There has been a bit of discussion of this as a way to manage gen X & Y expected SS and other retirement shortfalls.

When I see a plan like the one the OP brought up I think.... OH Boy here we go again. Pay through the nose into the system and then hope that they keep their grubby mitts off of it for when you need it. Remember the "trust Fund" and "Lock Box" and "Social Security is there for You" nonsense.

 

[ziggy29]

I question the sustainability of anything that more or less permanently guarantees CPI+3% with safety.

 

[dex]

There is nothing that is new; only the history you do not know.

VAT will come before nationalization of pensions.


Argentina's Pension Plan Presses On, Driving Down Markets and the Peso - WSJ.com
BUENOS AIRES -- Argentina's leftist government pressed forward with its controversial plan to nationalize private pension funds, laying out investment guidelines for the funds it wants to seize and lobbying Congress to approve the proposal.
Taking over the $30 billion in pension fund assets will ease the cash crunch faced by President Cristina Kirchner's government, but it has jolted investor confidence and triggered a dollar outflow.

++++++++++

U.S. Weighs Tax That Has VAT of Political Trouble - WSJ.com

At least 139 countries, including most major economies except the U.S., levy a value-added tax on goods and services.





But as the U.S. faces swelling deficits, talk of adopting one has become more commonplace and is likely to intensify. The latest rumblings came earlier this month, at a meeting of a White House commission looking for ways to dig the U.S. out of its fiscal hole.

 

[dex]

To me this sounds like a very good idea. Most people will screw up their retirement accounts either by insufficient contributions, or by poor investment choices. This will protect solvent, prudent people from having to pick up their checks. Also, the investment vehicle is extremely generous- compare it to TIPS! Any more adventurous investing that one wants to do could be done in taxable accounts.

It is also a way to keep the poor, poor. Under the current system the person can determine if they want to pass along their money to their family or withdraw more of their money to support a grandchild in college.

Also, it appears that the inherent racism in the current SS system would be in the proposal. All things being equal - except life expectancy, the black man gets less out of SS than a white man.


Life Expectancy

In 2003, white women lived an average of 80.5 years, while black women lived an average of 76.1 years. White men lived an average of 75.4 years and black men lived an average of 69.2 years.

 

[MasterBlaster]

It is also a way to keep the poor, poor. Under the current system the person can determine if they want to pass along their money to their family or withdraw more of their money to support a grandchild in college.

Also, it appears that the inherent racism in the current SS system would be in the proposal. All things being equal - except life expectancy, the black man gets less out of SS than a white man.


Life Expectancy

In 2003, white women lived an average of 80.5 years, while black women lived an average of 76.1 years. White men lived an average of 75.4 years and black men lived an average of 69.2 years.

By your logic, maybe we should race-normalize welfare too.

 

[dex]

By your logic, maybe we should race-normalize welfare too.

What would that mean in practice.

 

[rescueme]

I also posted this on Bogleheads...

I'm surprised you were not censured for posting a discussion about proposed legislation - not something that was not currently a law ...

 

[braumeister]

... a government managed ...

a frightening phrase if I ever heard one

 

[BigNick]

Also, it appears that the inherent racism in the current SS system would be in the proposal. All things being equal - except life expectancy, the black man gets less out of SS than a white man.

Life Expectancy

In 2003, white women lived an average of 80.5 years, while black women lived an average of 76.1 years. White men lived an average of 75.4 years and black men lived an average of 69.2 years.

Yes, but that's not racist, any more than it's sexist that women get more out of SS because they live longer than men. Indeed, to the extent that SS is something of a leveller, you could argue that it might be helping to keep black people alive propotionately longer than would be the case without SS.

 

[bssc]

Here is the factcheck.org link
Quick Summary

Teresa Ghilarducci, Nov. 18: It is utterly ridiculous [to suppose] that I advocate seizing 401k assets.

 

[fritz]

It is supposed to be SUPPLEMENTAL and VOLUNTARY retirement savings

Really find the insurance companies' eagerness to get involved with Individual self-directed "Supplemental and Voluntary" Retirement Accounts (in any version) troubling.

While I agree that most individuals have not embraced the concept of voluntary supplemental retirement contributions (trouble brewing for those individuals in being a burden to society in the near future), penalizing those that have taken full advantage of the programs and set aside adequate funds, is unjustifiable.

This won't go the avenue of allowing choices - you can't fund retirement income streams for those who won't set aside, with just their skimpy contributions. As with all pensions/annuities - success comes from allowing insurance companies to make money off the the aggregate contribution stream, while providing adequate? retirement income to those lucky enough to survive into retirement. And if you think you are the lucky one, remember - the odds always favor the house.

Note: Social Security is just such an annuity program. We all involuntarily contribute to the program (in private enterprise), and it follows the pattern just mentioned in the above paragraph. Do you even have to ask what's wrong with this picture?

The introduction/approval of allowing a person to supplement an obviously inadequate retirement income stream from Social Security, with their own voluntary (IRA) contributions was a novel and fair concept. The Roth was frosting on the cake. Take advantage of these voluntary supplemental programs, and your retirement should be more enjoyable than just surviving on Social Security (maybe even retiring early). Ignore it at your own peril.

This was not only a voluntary way to work at supplementing/securing a better retirement, but a way to accrue wealth (with the additional assistance of government tax incentives) - and to possibly leave the accumulated wealth that you have worked for (your whole life) - to your heirs.

 

[rescueme]

The introduction/approval of allowing a person to supplement an obviously inadequate retirement income stream from Social Security, with their own voluntary (IRA) contributions was a novel and fair concept.

It might have thought to have been, but in reality, I would say that any Roth/TIRA scheme really wound up as a major factor to eliminate defined benefit (e.g. pension) programs, which were used to supplement SS many years ago (at least for our parents/grandparents).

What Roth/TIRA's did was extend the idea of supplemental income to SS, but spread it against everybody (assuming you wished to contribute on your own) and thus covered those who's respective employer did not have a pension plan.

Only speaking for DW/me, it was not a fair system at all. Since we are/were non-public employees, the pension program that we had in place many years suddenly being eliminted and having to contribute our own funds (with no adjustment by the company since they no longer had a pension, beyond the meager 401(k) match) did more damage, in cases such as ours. For us, it was neither "novel or fair".

 

[fritz]

It might have thought to have been, but in reality, I would say that any Roth/TIRA scheme really wound up as a major factor to eliminate defined benefit (e.g. pension) programs, which were used to supplement SS many years ago (at least for our parents/grandparents).

What Roth/TIRA's did was extend the idea of supplemental income to SS, but spread it against everybody (assuming you wished to contribute on your own) and thus covered those who's respective employer did not have a pension plan.

Only speaking for DW/me, it was not a fair system at all. Since we are/were non-public employees, the pension program that we had in place many years suddenly being eliminted and having to contribute our own funds (with no adjustment by the company since they no longer had a pension, beyond the meager 401(k) match) did more damage, in cases such as ours. For us, it was neither "novel or fair".

As I see it - the standard pension benefit programs for employees started vanishing for most non-public employees much earlier. A lot of times it had tragic consequences for individuals (never the companies). The reason for creating supplemental individual retirement accounts was to assist those w/o pensions from their companies, or to supplement some very minimal/poor private pension programs. These were only meant to be supplemental and voluntary, and not to replace the main pension programs and Social Security - but private companies quickly shed themselves of pensions (so much for valuing loyal employees anymore). Did you ever have your company state that our employees are our most valuable asset? What's first to get tossed overboard when times get hard?

Companies originally set their own rules about pension and matching supplemental contributions vesting - most required you to be "fully" vested in the program, which originally ran +/-10 years - remember? If you left b/4 you were vested - you lost everything except your own contributions (just like when you die as a pensioner). Pensions build absolutely no wealth for you - just an income stream while you're alive. Some companies used to make you invest your contributions in "the company". Remember how many lost everything? Companies still invest their matching portion in "the company"..

In the old days - one expected to retire from their chosen company after 25-35 years. Back in the late 80's, I had to hang on for dear life in my tenth year to get vested in the only pension I ever received from a private company. That well known, fairly large company, was bought and sold a couple of times. FYI - I took a lump sum distribution and rolled it over into my IRA quite awhile ago. That option wasn't available originally - thank God for the third purchasing company.

During my career years - they used to say that you should no longer stay at your place of employment for more than 5 years if you want to get ahead. I have heard comments recently, that no more than 2-3 years and out, is acceptable. Even with the government mandated reduction of the 'employer DC vesting period to 5 years' - who usually hangs around for that amount of time? How many companies eliminated employees in the past that were close to vesting at 10 years, or even five?

Correction - 6 years Employer DC vesting (some companies won't even let you into their program until after your first year of service).

I know people who had solid pensions from reputable companies, who lost big time when the company went bankrupt (and this isn't just recently). Ever hear the stories of companies that deliberately underfunded, or outright stole employees pension money? I have. Ever since companies started gaming the system to rid themselves of employees' pension retirement programs a long time ago - it's gotten worse. You couldn't give me a private company pension these days - I don't feel that anyone can rely on them (other than union or government controlled programs). Pretty sad isn't it.

 

[kyounge1956]

Here is the factcheck.org link
Quick Summary

hmmph! That's what I thought, conversion might be available (I don't think it was part of the original plan) but would not be mandatory. The Carolina Journal should be ashamed of itself for refusing to correct their distorted reporting of the story.

Here's something from the factcheck info that was news to me: "What Ghilarducci proposes is to pay for her proposed $600 tax credit by taking away the deductibility of money put into an IRA or 401(k) over $5,000 per individual, per year." I thought her proposal would completely eliminate the option of putting money into 401k's, IRAs and so on, and make the GRA the only retirement savings option with no tax advantage.

I'm still not real fond of the idea, but it isn't confiscation of retirement accounts.

 

[traineeinvestor]

I am a fan of the Australian model which has mandatory contributions from both employer and employee.

There remains a safety net for those unable to save sufficiently for their retirement.

Key advantages:

1. mandatory contributions - people cannot elect not to save and to rely on future tax payers (it was phased in to prevent short term income shock)

2. immediate vesting/ownership of your money - no risk of someone else taking your money (absent theft by the trustees/bad investments)

3. portable - it does not matter if you change jobs

4. flexible - you get to decide where to invest (with simple default options for those unwilling or unable to take responsibililty). You can even set up and run your own private retirement scheme if you want (although I would imagine that the paperwork would be a nightmare)

5. not defined benefit - no risk of employer underfunding, having your plan restructured at some point in the future or actuarial miscalculations etc

6. wealth effect - turning many non-savers into savers has a wealth effect as well as creating a greater awareness of financial issues generally

7. reduced burden on future taxpayers

8. employer's obligation is certain

Unless you object to the idea of being forced to save, it's hard to see why more countries do not adopt this model. It certainly seems far better than what I have seen in most other countries (including HK's wealth destroying MPF scheme).

 

[chinaco]

+1 on Ha's comment.


The sad fact is that most (and that is the large majority of the population do not understand and cannot manage prep for retirement.)

Once one get's past the rhetorical political debate... they are left with only a few choices:

• Insurance Companies
• Investment (DIY or Financial Planner)
• Govt
• Work till you drop

While I would bristle at a mandatory participation type setup... I think it might be a good idea. But more details need to be described.


Bottom line: If you are not competent to go it alone... who do you trust more? The Life Insurance companies or the Govt? Those are the only options.


BTW - The Life Insurance industry is rubbing their greedy hands together at the mere prospect of lobbying to get their taste of 401ks! Talk about a group with an agenda... they are the group that wants to take over the 401k (different debate).... they are lobbying hard to get the "Default Investment of an annuity" in 401ks. That is a fact!

 

[dex]

I am a fan of the Australian model which has mandatory contributions from both employer and employee.

It is one of the better systems I've read about.

 

[Independent]

I also posted this on Bogleheads, but wanted some feedback from you guys.

I recently read ....

What do you guys think? Am I overreacting? Misunderstanding?

It would help a lot if you posted a link to whatever you read.

 

[rescueme]

Work till you drop...

I agree; that's the answer for everybody (except me )....

 

[Independent]

This is the first I have heard about this. But here is a summary of some main points:

• Employees would make mandatory contributions equal to at least 5 percent of their earnings. Workers could contribute higher amounts if they wish.
• Those contributions would be offset by a $600 federal tax credit each participant would receive.
• As with a 401(k) plan, workers would have individual accounts they could track. The balance of each account would depend on each worker's contributions and income level.
• The Social Security Administration would handle account management, and the Thrift Savings Plan -- a well-regarded retirement plan for federal employees -- would manage the money.
• Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent. For instance, if inflation stood at 2 percent, the worker would earn 5 percent; if inflation reached 3.5 percent, the worker would earn 6.5 percent. Participants could receive an inflation-beating return above 3 percent if the government's investment returns were high enough.

At retirement, participants' account balances would be converted into a lifetime stream of income that adjusts for inflation. There would be options to take partial lump sum payments, opt for lower payments in return for survivor benefits and, upon death, leave a portion of a financial account balance.

This sounded like a fine idea to me, after all, who can turn down free money? But then I realized it seems to be missing two bullet points.

• The $600 credit (which is $90 billion in total) will be funded by an new tax of ___% on all ____.
• If the gov't needs to make good on the 3% guarantee (which could be $100 billion in a single year if the average retiree earned 2.5%( it would institute a new tax of ___% on all ____.