The Olson file

401(k) follies


If you find this column of value, please send a donation of $3 to TLD. More information appears below.


Financially and politically, I was little more than a snot-nosed kid when Congress created the 401(k) retirement savings program in 1978. But even then I smelled a rat.

On the surface, it sounded like a good deal — just like so many of the disasters propagated by government. Big Brother would magnanimously allow workers to "defer" a certain, limited amount of income into a long-term investment account without paying taxes on those dollars! Funds in the account would (presumably) grow tax-free for the taxpayer's entire working life, and could not be withdrawn without a horrendous penalty until the individual reached age 591/2. At age 701/2, a certain amount would have to be withdrawn each year.

Besides the initial tax avoidance, the selling point was that the taxes paid as the money was withdrawn would be at a lower rate than otherwise, since the worker would have a lower income in retirement.

So what's not to like?

Well, even with virtually no real consideration of my own eventual retirement, and only a vague memory of John Lennon, Ingmar Bergman, and other celebrities of the day fleeing Britain and the Scandinavian countries to escape 101 percent marginal tax rates on high incomes, I was automatically uneasy about the scheme.

Who knew what the U.S. tax rate would be in that unbelievably far-off year, starting with the bizarre number 20 instead of 19, when I would be withdrawing funds from a 401(k) account — if I had one? Could the tax actually be more than the income I received? It had happened in Europe — who was going to say it couldn't happen here?

Even as a naïf, I instinctively realized that one could never count on the government not to implement a confiscatory tax rate within any period of half a century. Even then I was able to discern the political difference between "unearned" investment income and wages for actual work — and discern also that the former could be demagogued by socialist politicians and taxed unmercifully for the benefit of "working Americans" who chose not to save anything for their old age.

In short, I foresaw Obama and his cohorts in the 111th Congress. But I underestimated the evil and venality of current-day politicians — it's hard to imagine the unimaginable, especially as an inexperienced youngster. The proposals are far more Draconian and confiscatory than my innocent fear of 101 percent tax rates.

Before Obama was sworn in — even before he won the election — the House of Representatives held hearings, in October 2008, on a plan for federal seizure and confiscation of the $3 trillion that trusting Americans had put in 401(k) accounts over the previous 30 years. In exchange for acquiescing in that theft, witnesses proposed, the savers would be credited with the amount of their accounts retroactive to a date before the beginning of the current meltdown. The money, they claimed with a straight face, would be paid through the Social Security system when the victim reached some advanced age.

Never mind that the same government considering that scheme is trumpeting the fact that Social Security is hopelessly insolvent and will be unable to make even the payments due within a decade from then-current revenues. Never mind that the same government is aggressively silent on any action to "solve" this politician-created disaster — and that the Democrats, now in charge, immediately bring the wrath of Karl Marx and his latter-day disciples in government and the media down on the head of any Republican who hints at a free-market alternative for the slightest fraction of those who will inevitably be left holding the fiscal bag.

The main witness at the October hearing was Teresa Ghilarducci, the "Irene and Bernard L. Schwartz Professor of Economic Policy Analysis at The New School for Social Research," in New York City. Those credentials alone should make any honest observer immediately suspicious.

Ghilarducci's written testimony is unbelievably sloppy, and almost incomprehensible in places, but her attitude is clear. She is a socialist — if not an outright communist — and she doesn't want anyone to have appreciable retirement assets outside government control.

In her opening paragraph she complains about the "corrosive effects" of 401(k) and similar plans, and complains that they "add to the profits and growth of the financial sector and extracted [sic] ever-increasing tax breaks from the Treasury." Horrors!

Her proposal is to seize the 401(k) funds and replace them with federally administered "Guaranteed Retirement Accounts" composed of government bonds, earning a 3 percent return, adjusted for inflation — essentially a second Social Security program with a few extra bells and whistles. For every $50,000 given up today, the "worker" (her word) will be "guaranteed" $500 per month at retirement — which, of course, will be at whatever age Big Brother decides the worker will be allowed to cease his labors.

Ghilarducci's "long-term" answer is to force not just 401(k) participants but everyone into a similar program, where an additional 5 percent of their pay will be diverted, on top of Social Security, which she denies is on an actuarial trajectory toward disaster. The feds will magnanimously put $600 a year into each account, which would "defray the expense for most low- and middle-class workers (it pays for all the contribution for a minimum-wage worker)." The Social Security Administration, renowned throughout the world for its efficiency and accuracy, would handle the payouts.

If that doesn't send shivers down your spine, consider this.

Also unknown to me in the 1970s — and, I daresay, unknown to most people today — was the 1960 Supreme Court decision in Flemming v. Nestor, which declared that those who pay into Social Security have absolutely no contractual right to any benefits from that program. The Social Security "contribution" is simply another tax, declared the court; and Congress, with the signature of the president, has an absolute right to increase, reduce, or eliminate payments and other benefits at any time.

Think about that the next time you look under "FICA" on your pay stub.

April 25, 2009

© 2009 by Douglas Olson. All rights reserved.

If you found this column to be interesting, please donate at least $3 to our cause. You should make your check or m.o. payable in U.S. dollars to WTM Enterprises and send it to:

WTM Enterprises
P.O. Box 224
Roanoke, IN 46783

Thanks for helping to assure a future for TLD!

If you'd like to be on our e-mail list for update notices, please drop us a line.