Legendary economist Milton Friedman once joked that you could take any three letters from the alphabet, scramble them in any order you want, and you'll end up with an acronym for a federal agency we could do without.
I wonder what acronym Dr. Friedman would assign the potential government agency that would be charged with overseeing the obscene Guaranteed Retirement Account proposal that was recently debated several hundred feet below the radar in An October 12hearing of the Senate Health, Education, Labor and Pensions Committee.
Wait. It doesn't ring even a faint bell?
No surprise there. It's probably news to many as the GRA has been conveniently shielded by 5,300-plus pages of legislation otherwise known as the stimulus package, healthcare reform and the Dodd-Frank Wall Street Reform Bill.
But the concept has actually been lingering for several years.
The proposal is the handiwork of one Teresa Ghilarducci who serves as the chair of economic policy analysis at the New School of Social Research in New York.
In 2008, Dr. Ghilarducci penned, "When I'm 64: The Plot Against Pensions and the Plan to Save Them," a tome that examines the effect of pension losses on older Americans.
The good doctor, apparently taking umbrage about the roughly $80 billion or so that investors in 401(k) plans receive in tax breaks, shoveled out a plan that entails a multi-pronged system of Social Security, employer defined-benefit pension plans, and a prototype known as the aforementioned GRA.
Her plan calls for all workers not enrolled in a 401(k) equivalent or better defined-benefit pension to enroll in a GRA. Workers will accumulate savings in investment funds that earn a 3 percent rate of return guaranteed by the federal government. These funds will be converted to life annuities upon retirement. Along with Social Security benefits, these will replace approximately 70 percent of pre-retirement earnings for the typical retiree.
Tax breaks for 401(k)-style plans and IRAs will be converted into flat tax credits to offset the cost of these new accounts.
But like an iceberg, the real danger lies below the surface.
Right out of the box, the accounts would be administered by the Social Security Administration, a caution flag at the outset if there ever was one.
Secondly, under her plan the return is 3 percent.
The long-run return of the stock market, adjusted for inflation, hovers around 7 percent. If, for example, you enroll in this plan at 25 and you have lump sum of $40,000 growing at 3 percent per year. In 40 years, you will have $130,481.51 under the GRA. If you invested in the stock market, pending a 7 percent return for the same 40-year span, your principle would be just shy of $599,000. Considering the federal government's track record in financial matters, I'll take my chances with the market.
One of the changes that hasn't received the attention it deserves entails vested ownership. Once an employee is vested, he or she owns 100 percent of the 401(k). Should that employee die, the designated heirs receive 100 percent of the money. Under her proposal, the deceased's family would receive just 50 percent, with the rest circulated back to Uncle Sam.
It's also obvious she hasn't taken into consideration the inevitable fallout in the financial markets when trillions are withdrawn from those 401(k) plans and redirected to the government.
One also has to take into consideration that any traction this plan has heretofore received came at a time when 401(k) plans were plummeting at the heart of the financial crisis. When your retirement savings are shrinking faster than dry ice in a hot tub, people tend to look for any opening, no matter how irrational.
Ultimately, this is, as one analyst termed it, "a sibling Ponzi scheme working in tandem with Social Security," and giving out-of-control government spenders additional taxpayer funds to raid.
One can only imagine the chaos this scenario would usher in as it gives the federal government more control over the capital markets and the private sector.
And who's to say that the invested funds by government wouldn't be patronage acts or payback for campaign contributions - i.e., unions or one of bloated climate profiteer Al Gore's environmental causes?
It's bad enough U.S. taxpayers had universal health care rammed down their throats; I can't even envision the disaster in waiting of this "universal retirement."
The only acronym this proposal should be assigned is DOA.
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