Now He's After Your 401(k)
The White House pulls a switcheroo on retirement savings accounts.
Updated April 12, 2013 12:13 p.m. ET
How many times have you read
financial-advice stories lecturing you to max-out on your IRA, save as
much as you can in your 401(k), and even pay taxes now to change your
regular IRA into a Roth IRA that will be tax-free until you die?
Well, be careful how much you save.
Assistant OpinionJournal.com editor Allysia Finley on
President Obama's attack on tax deferred retirement accounts.
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That's the message in President
Obama's
budget for fiscal 2014, which for the first time proposes to cap
the amount Americans can save in these tax-sheltered investment
vehicles. The White House explanation is that some people have
accumulated "substantially more than is needed to fund reasonable levels
of retirement saving." So Mr. Obama proposes to "limit an individual's
total balance across tax-preferred accounts to an amount sufficient to
finance an annuity of not more than $205,000 per year in retirement, or
about $3 million for someone retiring in 2013."
Thus
do our political betters now feel free to define for everyone what is
"needed" for a "reasonable" retirement. Not to be impertinent, but does
this White House definition include being able to afford summers at age
70 at Martha's Vineyard near the Obamas?
The
feds may think $3 million is all you need after a lifetime of work, but
that's roughly the value of a California police sergeant's pension if
she works for 30 years, retires at age 50 and lives to normal life
expectancy.
Out in the private economy,
people generally have to work longer than that before they retire, and
some of them do manage to save significant amounts. We're talking about
people who work for decades and abstain from buying the bigger house or
the new car so they can contribute the maximum to their 401(k)s or IRAs.
The people who defer gratification and build a nest egg to avoid
becoming a burden on their kids or their fellow taxpayers. The people
whose savings finance productive enterprise. You know, the bad guys.
Best-selling
books used to celebrate these "millionaires next door" who worked and
saved their way to financial independence. But now Mr. Obama wants to
treat them as if they all got rich by sheltering investments in the
Cayman Islands or extracting bonuses from bailed-out banks or scooping
up sweetheart mortgage deals from allegedly nonprofit universities.
Someone should tell the President that most Americans can't swing the
bonuses that his Treasury Secretary
Jack Lew
arranged at NYU and
Citigroup.
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The budget offers few details on
how the government would enforce this cap across a worker's various
accounts, but you can bet it would be complicated. Right now the
government doesn't track all tax-deferred account balances. Financial
firms don't have to send IRS 1099 forms to investors unless there's a
distribution, nor do the firms know how much customers hold at other
institutions.
So the IRS would get new
power to impose new burdens on millions of taxpayers. And all so the
government could raise what the White House claims would be $9 billion
more in revenue over 10 years, as if people wouldn't change their
savings habits. After this proposal, only a fool would pay taxes now to
transfer to a "tax-free" Roth IRA that the feds may decide to tax
someday.
The Occupy Wall Street crowd
will be cheering this ideological assault, but the occupiers who mature
into productive citizens will someday find themselves in the
cross-hairs. The cost of a $205,000 annuity changes over time and
inflation will reduce its value. The Employee Benefits Research
Institute points out that such an annuity stream could be had for as
little as $2.2 million, not $3 million, within the last several years.
As a result, EBRI estimates that under such a scenario as much as 6% of
today's younger workers age 26-35 could end up hitting the cap.
Liberals
say tax-advantaged plans are unfair because the affluent benefit more
than the poor. It's true that you can save more when you earn more, but
the savings are also channeled into productive investment and they are
eventually taxed when they're withdrawn. Congress wanted to encourage
people to save, especially as it understood that Social Security and
Medicare will become increasingly unaffordable.
The
Treasury Department says its proposal would still allow existing
accounts to continue to grow tax-free until distributions occur, but it
would prevent new contributions once a saver hits the cap. We'd be happy
to support a reduction in these tax incentives as part of a tax reform
that reduced tax rates. But until that happens, these tax incentives are
ways that thrifty Americans can shelter savings from punitive tax
rates.
The Administration's political
motive here is two-fold: First, it's a redistributionist play and a
revenue grab. But for many on the left it's also about reducing the
ability of individuals to make themselves independent of the state. They
have always disliked IRAs, just as they oppose health-savings accounts,
because over time they make Americans less dependent on federal
entitlements or transfer payments.
Amazingly,
Mr. Obama has surveyed the economic landscape and somehow decided that
it's time to discourage savings if you make more than he thinks is
"reasonable."
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