Posted by
Always To The Right on Thursday, October 23, 2008 4:19:30 PM
US News columnist James Pethokoukis has one word for the nationalization of tax-deferred retirement plans: socialism.
He can’t quite believe Democrats would be this foolish in an election
year, but Pethokoukis forgets that this is the Age of Obama. The
Audacity to Hope for Socialism Change has arrived:
I hate to use the “S” word, but the American government would never do something as, well, socialist
as seize private pension funds, right? This is exactly what
cash-strapped Argentina just did in the name of protecting workers’
retirement accounts (Efharisto, Fausta’s Blog). Now, even Uncle Sam isn’t that stupid, but some Democrats might try something almost as loopy: kill 401(k) plans.
House Democrats recently invited Teresa Ghilarducci, a professor at
the New School of Social Research, to testify before a subcommittee on
her idea to eliminate the preferential tax treatment of the popular
retirement plans. In place of 401(k) plans, she would have workers
transfer their dough into government-created “guaranteed retirement
accounts” for every worker. The government would deposit $600
(inflation indexed) every year into the GRAs. Each worker would also
have to save 5 percent of pay into the accounts, to which the
government would pay a measly 3 percent return. Rep. Jim McDermott, a
Democrat from Washington and chairman of the House Ways and Means
Committee’s Subcommittee on Income Security and Family Support, said
that since “the savings rate isn’t going up for the investment of $80
billion [in 401(k) tax breaks], 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.”
Pethokoukis also asks a question that I neglected in my earlier post:
What effect would this plan have on an already battered
stock market? Well, I would imagine it would send it even lower,
sticking a shiv into the portfolios of everyone who didn’t jump aboard.
But I am sure the Chinese would love to jump in and buy all our cheap
stocks to fund the retirement of their citizens.
I’d suggest that Pethokoukis vastly underestimates the effect this
change will have on the stock market. The advent of private
tax-deferred retirement accounts created a huge investor class in the
US. By some estimations, more than 70% of American adults have money
in the stock market in long-term investments for their eventual
retirement. That’s a revolutionary change in the relationship between
labor and ownership, one that capitalism succeeded in creating where Marx and his followers only fantasized.
What happens when the tax deferral on this investment ends? Most
people won’t want to take the risks of the market without it, certainly
not on the scale they do today (about $5 trillion in capital)
and likely not after the Fannie Mae/Freddie Mac collapse. They’ll
start moving to savings accounts or gold and removing their money from
the markets. The flight of capital will eliminate the necessary engine
for recovery, but that’s a minor point. The price of stock will
utterly collapse as everyone looks to liquidate their holdings,
crashing Wall Street and throwing tens of millions out of work as
publicly-held companies disintegrate.
Want to see the Dow at its status before tax-deferred private
investment accounts got approved? We’ll look at 8500 with wistful
nostalgia. Get ready for 1500.