The official national debt continues to accelerate upward….
We’ve added tens of trillions of dollars more in unfunded liabilities….
The Obama administration is responding by putting your retirement accounts in its crosshairs. This story will focus on recent developments on the road toward IRA and 401(k) nationalization. I’ll also suggest ways for you to take defensive steps without necessarily cashing out your accounts prematurely.
I must stress that the roadmap toward an eventual government takeover of private pensions isn’t precisely laid out, turn by turn. We don’t know the exact route the government will take. And we don’t know how long before it begins to implement draconian measures.
But we do have plenty of clues. We know where the Obama administration and its allies ultimately want to take us. Right now, Mr. Obama is taking steps that will allow a future administration to seize greater control of your retirement funds. Possible steps include mandatory ownership of Treasury bonds, confiscatory withdrawal taxes, or outright asset confiscation.
Of course, the possibility of a sudden crisis in the economy could trigger an immediate “emergency” response from the Obama administration.
Private Pension Funds Being Assaulted By
Cash Desperate Governments – See This
Financial crises are playing out in other parts of the world. Desperate governments there have raided pensions with little warning to retirees. Consider a sampling of recent headlines:
- Portugal Raids Pension Funds to Meet Deficit Targets (Telegraph)
- Poland Confiscates Half Of Private Pension Funds To “Cut” Sovereign Debt Load (ZeroHedge)
- Hungarian Savers Say Government is Stealing Their Pensions (Reuters)
- Cyprus Makes Plan to Seize Portion of High-Level Deposits (New York Times)
- Russian Pensions Paid for Putin’s Crimea Grab (Bloomberg)
The U.S. Treasury has temporarily dipped into the federal public pension fund on six occasions over the past 20 years. They’ve used those funds to avert government default in the face of looming debt ceilings. There is a precedent.
We’re just one legislative or administrative mishap away from becoming another dysfunctional country that seizes pensions out of desperation.
Mr. Obama’s Funny Money
“Automatic IRAs” Get Legislative Push
The headlines concerning pensions and retirement accounts here in the U.S. may not seem as scary as they are in other parts of the world. But the trends are ominous. Especially if you look at them in the context of a broader, long-term leftist push to gain control over your retirement accounts. Consider this headline: “Illinois Enacts Automatic IRAs; Is Federal Mandate Coming?” (Forbes, January 7, 2015).
Under Illinois’ new Automatic IRA law, employees will have a portion of their paycheck automatically directed to an IRA. (Objectors may opt out, but they have to fill out forms to do so.) These automatic IRA funds will be invested in a life-cycle or target-date fund. One with a mix of stocks and bonds that increases the allocation to bonds over time. No diversification into precious metals or other alternative assets. No inflation protection to speak of.
First Obamacare Mandates,
Now We Have Investor Mandates
Christopher Woehrle, Assistant Professor of Taxation at The American College, said, “While there will be roadblocks and dissenters to any automatic savings program, what is clear is that Americans are not saving enough for retirement on their own and need some assistance.” By “assistance,” of course, he means government force.
Herding the public into IRAs that will be increasingly weighted toward bonds combines heavy-handed paternalism with tired, old asset allocation theories that worked in the past.
The bond market has become a giant asset bubble. It’s bigger than any stock market bubble in history. Is it possible that bonds will continue delivering steady returns for the duration of your retirement with little or no erosion in real value due to inflation? Sure, it’s possible. But the risks of owning bonds with yields at historically low levels are significant (though underappreciated) and the rewards are de minimis.
That’s not to say that certain parts of the government won’t benefit from herding the public into bonds.
Earlier this year Congressional Democrats introduced a bill to mandate Automatic IRAs nationally. Under the proposed law, companies with at least 10 employees would have to either cover them with an employer-sponsored retirement plan or enroll them in Automatic IRAs.
The Automatic IRA bill has the backing of the left-leaning AARP, one of the most powerful lobbying groups in Washington. And it’s sure to have the
support of the White House.
Treasury Department Begins Herding
Workers into Government MyRAs
The White House has already acted unilaterally to herd the public into government bonds. Last December, the Treasury Department launched a pilot program with a small group of employers. It’s designed to help corral their employees into what are euphemistically called “MyRAs.” The MyRA (“My Retirement Account”) program was created through executive action by President Obama.
Despite what its name suggests, the MyRA is not customizable to suit your personal investing objectives. In fact, the only investment available in a MyRA is a special Treasury security. That’s the investment President Obama selected. A more accurate name for a MyRA would be an ObamaRA.
In his 2014 State of the Union Address, Obama introduced this program to the American people. He boasted, “MyRA guarantees a decent return with no risk of losing what you put in.” He was not telling the truth. The notion that an account holding only government bonds carries “no risk” is an even bigger whopper than the president’s infamous “If you like your healthcare plan, you can keep it” line.
These Obama-Created Investments
Are Setting Up the Sheep for Fleecing
The MyRA might seem relatively innocuous compared to Obamacare. After all, you as an individual aren’t being forced to pay into a MyRA. At least not yet. But the precedent is a dangerous one. Even more so because the President didn’t even bother to mislead Congress into authorizing ObamaRAs. He unilaterally ordered the Treasury department to create them.
According to a Treasury spokesperson, “During 2015, we expect to take significant additional steps to broaden the reach of the program.” Of course they will. Among bureaucrats’ aims is to pressure more employers to offer direct deposit so that portions of employee paychecks can be automatically diverted into ObamaRAs.
And what an incentive Treasury officials have to get more Americans signed up for these so-called MyRAs! Unlike IRAs which can be invested in stocks, corporate or foreign bonds, or even precious metals, ObamaRAs offer one and only one investment: a low-yielding Treasury security. The more people the Treasury can get to sign up for ObamaRAs, the more funds will flow right back into the U.S. Treasury to help the government meet its borrowing needs. How convenient!
Obama Floats Proposal to
Tax College Savings Plans
“The idea of the U.S. government confiscating everyone’s 401(k) is unimaginable to all but the most ardent conspiracy theorists. However, it’s not unrealistic to think that the American government could take a bigger bite out of individuals’ 401(k) assets with higher tax rates,” according
to Bloomberg economics writer Allison Schrager.
But really, the difference between asset confiscation and higher taxes on those assets is only a matter of degree.
If the government were to impose a 50% or greater tax on IRA or 401(k) balances above a certain amount, that would be a confiscatory tax. If
the government were to revoke promised tax breaks on retirement accounts, that would enable the government to lay claim to a larger portion of the more than $5 trillion in private retirement accounts. It’s all about the money – and the political redistribution of it.
In January, President Obama submitted a budget proposal that would eliminate the ability to make tax-free withdrawals from 529 college savings plans. The backlash was significant. Facing overwhelming opposition in Congress, the president backed down. This was a trial run. A window into the kind of action that you can expect in the future against “tax-free” retirement accounts. Obama’s next legislative trial run may be his call to cap
the amount of wealth individuals can accumulate within tax-advantaged accounts.
Obama’s Savings Plan “End Game” Quite
Literally Assumes You Are Stupid – See Below!
Obama wants to “transform” this country. That has long been the stated aim of this president. He confirmed it again in his recent State of the Union
Address. And he’ll do it by any means he can get away with… to heck with the Constitution.
As with Obamacare, the ideological basis for ObamaRAs, Automatic IRAs, and other planned changes to the retirement system can be found in the writings of professional academics. Disgraced MIT professor Jonathan Gruber admitted that Obamacare was structured to take advantage of what he called “the stupidity of the American voter.”
The belief that most Americans are too stupid to be allowed freedom of choice when it comes to health insurance and retirement savings is widely held among the liberal intelligentsia. In 2010, Independent Living introduced you to professor Teresa Ghilarducci, who is helping to lead an effort to replace IRAs and 401(k)s with government-controlled pensions.
Ghilarducci called the 401(k) a “failed experiment.” She says IRAs are even worse: “An Individual Retirement Account is very similar to a 401(k) except it’s worse. …At least the 401(k) has some scrutiny by an employer and has a more sophisticated buyer than an IRA buyer…”
Will the GOP House and Senate Stop This
Coming Retirement Fund Grab? Not Likely.
So there you have it. Individual investors aren’t “sophisticated” enough to buy investments for their retirement accounts. Has Professor Ghilarducci never heard of index funds? They’re easy to buy and easy to understand – unlike the tax code. But instead of calling for the elimination of needless complexity and the constant threat of IRS penalties for missteps within IRAs, Ghilarducci wants to restrict choices.
On January 29th, she posted this comment to her micro-blog: “Mean 401(k) balances hit record highs at $91,000 – dinner and a movie and maybe cable. We need real pensions!” And to her and the other high-brow sophisticates who share her views, that means restricting your freedom of choice. For your own good, of course.
If you think Republicans will block all efforts to undermine private retirement accounts, don’t get too confident. In a financial crisis, there’s no telling what politicians may be scared or intimidated into doing. Think back to the financial crisis of 2008…and back to the aftermath of 9/11. Republicans pushed through massive expansions of government that they had never campaigned on.
Even if the GOP Congress opposes all future efforts to give the federal government greater reach into retirement accounts, Mr. Obama’s Executive Orders have rendered Congress increasingly irrelevant.
The Democrats know they are going to be in the minority in the House of Representatives for some time. But they still have a good chance at retaining the White House in 2016. The next president will be positioned to rule by Executive Order on a previously unimaginable scale. All thanks to the precedents set by the current president.
Why Cashing Out Your IRA May Be a Bad Idea
With all the gathering political threats to retirement accounts, should you preemptively cash out of them? It’s not a question that can be answered with a definitive “yes” or “no.” There are long-term risks associated with IRA and 401(k) accounts. There are also immediate disadvantages to pulling funds out of them. If you have to pay taxes plus a 10% penalty on your distributions, that’s a powerful reason to postpone taking them.
Consider also that funds transferred from an IRA to a regular bank or brokerage account may be more vulnerable to litigants and creditors. IRAs and 401(k)s don’t offer bullet-proof protection from creditors, but assets held within qualified retirement accounts are usually harder to break into through the legal system. So retirement accounts can play a part in your asset protection strategy, along with insurance and trusts.
There are some circumstances that may warrant taking early distributions from retirement accounts. If you need the money for emergency expenses, then you may need to tap your retirement accounts. There are ways of doing so without incurring taxes or penalties. For example, you can borrow against your 401(k) balance. Or, if your needs are short-term, you can take distributions from IRAs and redeposit them within 60
days without penalty.
You can avoid the early withdrawal penalty at any age by taking “substantially equal periodic payments” (asin an annuity) from your IRA. If you don’t have an immediate need for cash, then this tactic for diversifying out of an IRA over time may make more sense than cashing out all at once.
We continue to stress diversification as a core investment and asset protection strategy. It’s not necessary (at this time) to liquidate all your retirement accounts and convert the proceeds to gold bullion. Yes, you should own some gold outside of the financial system. And if you have to take some money out of retirement accounts in order to do that, then that’s the cost of being truly diversified.
Remember that the goal is to spread out your risk exposure so that no single threat will be able to cause your financial ruin. The political threat to retirement accounts is one that needs to be taken seriously. But not to the exclusion of all the other potential threats out there.