85 percent of all statistics are made up. The assertion you just read is a great example of it.
Along the same lines, there’s a distinction between being rich on paper—that is, figuring among the nation’s top earning bracket, and so on—and being rich in real-world terms.
President Obama has recently suggested that 401(k) values be limited to around $3.4 million. Other retirement accounts would also receive similar treatment. On the face of it, that sounds fairly reasonable. But closer looks begin to reveal some troubling matters.
First, under his proposal, the tipping point where one can no longer deduct contributions to a retirement account is not set at $3.4 million. Rather, the real point is how much you’d be paying, at age 62, for an annuity resulting in $205,000 a year.
And as CNNMoney points out, the $3.4 million actually combines pension and retirement accounts, and this is bound to go down. Why? Because annuity issuers will charge less for annuities as interest rates go up. Remember, rates today are probably about as low as they’ll get for a long time to come. The Fed’s easing program is skewing this for the future.
Presidential Retirement Package
The second troubling point is the disparity between the President’s proposal for the masses and the reality of his own financial setup. A CNNMoney analyst estimates the President’s likely retirement setup.
Basically, at the time the President leaves office, he’ll receive an annual pension worth $3.86 million. Combined with his other allowances and benefits, he stands to receive $6.6 million.
Obviously, it’s silly to expect a nation’s President’s financial setup to be on par with the average citizen’s. However, it’s the fact that the President’s proposal shifts a lot of responsibility (and adds costs) onto employers that seems a bit over-the-top.
And, of course, it’d mark the first time any defined contribution plan came under caps. The New York Post quotes Peter Brady, a senior economist at ICI, on the potential complications:
“The proposal to place a dollar cap on individual retirement saving accounts would add complexity and confusion to our nation’s system for retirement savings.” “This unworkable proposal to cap individuals’ savings in 401(k)s, other defined contribution plans and Individual Retirement Accounts (IRAs) would discourage employers from creating retirement plans and workers from contributing.”
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Added Costs, Added Problems
Earlier estimates from the Employee Benefit Research Institute indicated that just about 180,000 out of some 60 million who stand to benefit from retirement accounts would be affected by the cap issue. Revised estimates suggest a worse scenario—nearly 1 million people now in their 20s and 30s who continue to make contributions to their retirement accounts would also face the problem.
Beyond that, there’s the problem of the added work imposed upon employers offering such retirement plans. Given that employers would now need to collect information on each employee’s retirement account figures, compare them to the annual limit, and keep all relevant records—it’s quite a bit of added cost to the employer.
We can readily recall how employers were affected, even threatening to cease hiring or dismiss employees, when the President’s healthcare plan passed. There are similar considerations here—employers may choose to simply stop offering retirement plans due to the added costs.
Even the Securities Industry and Financial Markets Association is worried, as it told the New York Post:
“Savings have a positive effect on the capital markets, while helping maintain and improve the quality of life for future generations of retirees. We need to be emphasizing the importance of saving and saving early, not changing the tax rules midstream.”
The roots of this Presidential initiative trace back to a 2007 report by the Economic Policy Institute, which suggested that tax breaks under retirement accounts disproportionately favor the rich, cause revenue losses for the government, and reforms are needed to retirement savings systems in order to benefit the poor and the middle classes.
But as more and more Americans dip into their retirement accounts to finance present-day needs (especially given the protracted economic downturn and slow recovery), it’s particularly troubling that the President’s proposed reform takes the form of imposed caps on contributions.
Worse, by shifting costs onto employers, the proposal has the definite potential to scare off small businesses and even larger ones. Nobody wants to assume additional costs right now.
The President’s plan could put a lot of people’s retirement plans at risk, even as his own future remains safe.
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