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House Democrats contemplate abolishing 401(k) tax breaks

House Democrats contemplate abolishing 401(k) tax breaks

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Sara Hansard October 12, 2008, 6:01 AM EST

Powerful House Democrats are eyeing proposals to overhaul the nation's $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

House Education and Labor Committee Chairman George Miller, D-Calif., and Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.

A plan by Teresa Ghilarducci, professor of economic-policy analysis at The New School for Social Research in New York, contains elements that are being considered. She testified last week before Mr. Miller's Education and Labor Committee on her proposal.

At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months. Under Ms. Ghilarducci's plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5% of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay

3% a year, adjusted for inflation.

The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

"I want to stop the federal subsidy of 401(k)s," Ms. Ghilarducci said in an interview. "401(k)s can continue to exist, but they won't have the benefit of the subsidy of the tax break."

Under the current 401(k) system, investors are charged relatively high retail fees, Ms. Ghilarducci said.

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Reply to
beliavsky
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Funny, when the market was screaming, and overpriced, they were talking about putting social security into stocks. Now that we are off 50% from the recent high, and we should be buying in, they want to kill the only savings vehicle most of us have left.

(by 'they' I mean congress, I'm not pointing toward any particular party. And I also reference that pensions have mostly gone away, so I'd wish for higher limits on 401(k), not their elimination.)

Joe

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Reply to
joetaxpayer

On Oct 17, 9:55 am, joetaxpayer

I hear you and tend to agree. I have not studied this thoroughly but a few other impressions I would throw into the mix are:

  2. 1(k) fees are higher. It makes sense to fight this.

  1. Social Security is going broke. This is some kind of fix for this, as long as one believes in the notion of Social Security income yada in the first place. Granted many do not.

  2. We are at record deficits. Taxes either have to go up or we have to cut spending elsewhere to address Medicare, for one.

  1. I never liked that the contribution limits for a 401(k) were so much higher than for an IRA.

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Reply to
honda.lioness

Mine has a .05% expense for S&P index. Other funds not as great. Employer matches first 5% dollar for dollar. I agree, and have written about the high fees, esp for smaller companies.

Wow, killing the 401(k) to save SS? Isn't this a 'throw the baby out with the bath water' example? I know you don't support that this is the fix, just that's it's proposed to be so.

Cut pork. Cut all subsidies to tobacco companies or oil producers.

We make too much to deduct the IRA deposit, and given our earnings, even the current 401(k) limits are barely high enough to cover the amount we need to save.

I think the retirement accounts are too many, each with their own rules. They should all be combined to one set of accounts with pre or post tax money, and all pre-tax deemed to be Roth money. I'd not even take a stab at what fair limits are, but the 2009 numbers are out, $16,500 for

401(k) with $5,500 for age 50 catch-up. Joe

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Reply to
joetaxpayer

The money

and how will that money earn 3% adjusted for inflation? That money will get spent on pork and largess. It will not be anywhere when it is needed to be paid out. Then, we will have the same situation we currently have with Social Security, only with greater false expectations.

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Reply to
Gil Faver

This is extremely stupid, indeed.

The good point in the material that you quoted, is that indeed the fees on many 401ks are outrageous. My own 401k is a good example.

i

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Reply to
Igor Chudov

Nice to see you at least admit that this is nothing but a new tax to enable the government to spend more money.

What is the guarantee that the government will not decide at some future point to means-test or otherwise impair your withdrawals from this "account". There is none.

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Reply to
themightyatlast

It may also be notable for "They, The Worthy Gentlemen From Either Other Side of the Aisle", that they were apparently snoozing in the cloak room or something while trillions of dollars of 40 times leveraged CDO's were accumulating in the broom closets of investment banks.

Rules and regulations that in effect confiscate earnings, thus presumably preventing the wage-earner from spending them, Social Security I believe never actually earns interest, as payments are funded directly from collections (a flow-through redistribution of income). The best compromise was a tax incentive program such as IRA's and 401k's. I still encourage individuals to learn to do fundamental analysis of corporations, based on earnings growth and potential, then buy individual stocks for their portfolios - maybe I'm under- estimating the difficulties many have with that, but some education in stocks along with high school economics might make things a lot easier.

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Reply to
dapperdobbs

The sarcasm is unnecessary. I try to call it like it is. It is a proposed new tax to deal with record deficits and anything else that roughly the majority of people (who put their representatives in office) want. The government does not spend money, unless you are into boogiemen. The taxpayer spends the money.

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Reply to
honda.lioness

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