IRA safe from government?

[byehi]

Don't mean to sound too tinfoily here but does anyone besides me hesitate a little to continue to put money into IRA's/Roth IRA's considering the way things are going in this country?  I don't just mean investment risk, but confiscation risk, etc. through "legislative action" such as the imposition of certain investment requirements (i.e. treasuries) or changes in the rules governing them, such as higher age requirements or higher penalties for early withdrawals,etc.?  I get a nagging feeling when I make out those checks to my IRA account that I'll never see that money again! Sound crazy?  Maybe I read too many blogs!

[MediumTex]

I can tell you that when there were proposals floating around D.C. a year or two ago talking about requiring that treasury bonds be provided in retirement plans as an option, the blogosphere took it and ran with it and congressional offices were overwhelmed with complaints about this "confiscation" of retirement accounts that was being planned.  As one would expect, the proposal to provide the option to invest in treasury bonds fell off the radar.

I simply see no political will in Congress to get behind any kind of restrictions on what you can invest in in retirement accounts, and certainly no political will to confiscate retirement accounts.

Any possible analog that anyone attempts to cite in other countries (e.g., Argentina) is simply inapplicable to the U.S., since the U.S. has the luxury of being able to borrow and print its own money.  Take right now, for instance, where the Treaury Dept. is raiding federal employee retirement plans to keep from defaulting on treasury debt.  No one seriously thinks that this money won't be paid back, since it's all just bits and bytes in some computer anyway.

I wouldn't worry about IRAs at all.  It's certainly possible that the rules could be changed for future IRA contributions, but for past IRA contributions any attempt to change the terms or confiscate the funds would run into so much political and legal trouble (the legal issues are unconstitutional "takings" associated with such changes) that I don't see how it could get any traction when all the government needs to do as an alternative approach is print up some fresh money.

You won't see many people on the internet with the perspective I am describing above.  It's much easier to scare people with a bunch of vague and unsubstantiated rumors.  If a concrete proposal for some kind of confiscation of retirement accounts is ever before Congress, I would write your congressman and senators and ask that they oppose any such measure.  I'll bet you won't be alone.

[AdamA]

Don't mean to sound too tinfoily here but does anyone besides me hesitate a little to continue to put money into IRA's/Roth IRA's considering the way things are going in this country?  I don't just mean investment risk, but confiscation risk, etc. through "legislative action" such as the imposition of certain investment requirements (i.e. treasuries) or changes in the rules governing them, such as higher age requirements or higher penalties for early withdrawals,etc.?  I get a nagging feeling when I make out those checks to my IRA account that I'll never see that money again! Sound crazy?  Maybe I read too many blogs!

This is slightly tangential to what you're asking, but...

I reluctantly invest in retirement accounts b/c I hate to pay high taxes.  However, I hate that idea that I have to wait until I'm 60 to use any of the money.  To me, this is already a bit of a scam in and of itself. 

I've started putting money in taxable accounts in favor of retirement accounts, just because I'd like to be able to actually use it now , while I'm young.  It's nice, for example, to be able use PP funds to pay rent and other living expenses.  I view these taxable accounts as really good savings accounts, and still occasionally put some money into my Roth or my 401K. 

[Tortoise]

I get a nagging feeling when I make out those checks to my IRA account that I'll never see that money again! Sound crazy?

Not at all. I sometimes feel the same way.

I don't know what the government will be like in 30 years, nor what kinds of laws or regulations they are likely to pass between now and then. But whether you decide to continue directing savings into retirement accounts (like I do) or keep it all in taxable accounts, just keep saving. That's probably the single most important factor that will differentiate you from the Alpo-eaters when you eventually retire--not whether your account was taxable or tax-advantaged, but simply how much of your income you saved. Hopefully this will help alleviate at least a little bit of your anxiety regarding the future of tax-advantaged accounts in the U.S.

That being said, however, the wise Harry Browne did suggest that it's always a good idea to set aside a budget for pleasure. You never know what the future will bring--nor whether you will even still be here when that future arrives--so why not spend a little bit today (doesn't have to be a lot) on things you enjoy in life? That, too, should help to occasionally take your mind off of the unknowable future of retirement accounts in the U.S.

If you are a PP investor and you hold most of your 25% gold allocation in your physical possession (in safe deposit boxes, at home, etc.), you will fare far better than most people if the unthinkable were to happen and the government were to become even grabbier with Americans' paper assets. Because the gold in your possession will give you some options that other people will not have. I'm not advocating anything shady... just saying'. Having options is good.

[craigr]

I feel at a minimum that in the future your personal savings will be used to reduce your Social Security benefits. So this is confiscation of SS assets by a round about away.

[moda0306]

Craig,

Though I doubt any means test that you speak of would apply to IRA's without applying to other taxable accounts, I see withholding SS benefits of high wealth or (more likely (easier to compute)) high-income individuals as a definite future possibility.  

A "means test" is almost currently what we have to some degree.  Up to a certain point of AGI, SS isn't taxed.  In a certain window, 50% of your SS income is taxed, and above that it's 80% or 85% of the income that's taxed (can't remember which).

So while one person is getting 100% of their calculated benefit, another may be getting about 65% of his calculated benefit (assuming states have the same phase-ins).  I can't imagine there's a much easier way of means-testing than by using that same framework.... Seniors are NOT going to like having to send in "means test" forms with all their wealth listed on it every year, and the AARP is like the 4th branch of government.

I think they'll pluck the hen the way they always have... taxability phase-ins.

[HB Reader]

MT is right.  I'm pretty sure any attempt, even decades from now, to confiscate or dramatically change distributions of existing IRAs or 401Ks would run head long into an immediate "unconstitutional takings" claim, not to mention a political firestorm bigger than any of us have ever seen.  I've seen takings claims arise from far less obvious frontal assaults.

Stealth means testing for SS or other benefits (like craigr and moda0306 suggest) and/or straight higher marginal tax rates on the "wealthy" are far more likely.

While recognizing that nothing in this world is truly sacrosanct (which is why you need a HB4x4 PP to begin with, like Tortoise suggests), I'd place concerns about IRA and 401K confiscations pretty far down on my worries list.         

[moda0306]

Yes... In the end, if confiscation manifests itself (like it hasn't already), it will be in the form of taxes or inflation.  Those are SO much easier than simply going in and grabbing someone's entire IRA.  Some ACTUAL threats to look out for are the following:

- A "wealth" tax... could be on all wealth, or just taxable accounts, above a certain level

- Further manipulation of SS taxation

- Remove/raise FICA wage cap

- Higher overall tax rates

- FICA and medicare taxes on investment income (latter is already coming for some people)

- Increase in Required Minimum Distributions

- RMD's on Roth accounts (moves money into taxable accounts faster)

- Taxing Roth IRA distributions (probably in the form of a "surtax" that's less than ordinary rates).
    *This I find somewhat unlikely unless one or a few of the others have happened already.

- Inflate away bond-holders' wealth

- MAYBE some other type of SS means test


Any of these would be far easier than "blatant" confiscation... and blatant confiscation is almost something you can't get around unless you want to take on the police...

That said, I think it's completely legitimate to worry about all those things and try to hedge against them... if that's even really possible.  Due to my asterisk point above, if one is really afraid of confiscation, they should be more apt to put into a Roth IRA than anything.  I know the government could start taxing it, but like a river never tries to flow uphill, congress will simply work within an easy framework that already exists before trying to create a new framework... I doubt Roth IRA's will ever get taxed at all unless ordinary rates have already been raised considerably, and some of the other things up there maybe have been done.

So it may sound odd... but when I get reallly scared about possible future government confiscation, I go straight to my Roth and sleep tight... by the time they touch that with a surtax, everything else will be taxed much moreso than it is now...

not to mention, it's quasi-liquid, no RMD's, is FAFSA-invisible, has a higher effective contribution limint ($5,000 in a roth has no future tax liability attached to it, but $5,000 into a an IRA does) and if there ever is a means test, could very well not even count (either the wealth or the income) against you.

[byehi]

So I guess the consensus is that there are less obvious ways for Congress to achieve the same result.  Wouldn't you think, that in regards to means testing SS, that a persons savings/lifetime earnings ratio would be taken into consideration and the higher the ratio perhaps the lower their ss tax rate within limits, of course. What a great savings incentive.  Can't see the banks going for that though, so can't happen. Pretty naive thought,I know.

[MediumTex]

It's kind of like the people who are worried about the government "confiscating" their gold.  Why would the government want to confiscate gold when it could simply buy the gold back if it wanted to by offering a purchase window with a price significantly above spot?

Also, on the topic of gold confiscation, it seems to me that the government would want to stop selling gold (in the form of eagles, buffalo coins, etc.) before it got into the business of confiscating it, right?

[Tortoise]

It's kind of like the people who are worried about the government "confiscating" their gold.  Why would the government want to confiscate gold when it could simply buy the gold back if it wanted to by offering a purchase window with a price significantly above spot?

Wouldn't that simply cause gold's spot price to rapidly rise to the government's bid price? To keep moving merchandise, gold dealers would sell to the government at its high bid price and then turn around and buy from customers at a slightly lower price to turn a profit. They could get away with slightly underbidding the government if they had a loyal customer base and offered greater convenience. (After all, hardly anybody enjoys doing "business" with the government.)

Also, on the topic of gold confiscation, it seems to me that the government would want to stop selling gold (in the form of eagles, buffalo coins, etc.) before it got into the business of confiscating it, right?

Not if they stop selling gold on the exact same day they announce the confiscation

[MediumTex]

To keep moving merchandise, gold dealers would sell to the government at its high bid price and then turn around and buy from customers at a slightly lower price to turn a profit. They could get away with slightly underbidding the government if they had a loyal customer base and offered greater convenience. (After all, hardly anybody enjoys doing "business" with the government.)

Isn't that what the Fed does with treasuries?

[AdamA]

To keep moving merchandise, gold dealers would sell to the government at its high bid price and then turn around and buy from customers at a slightly lower price to turn a profit. They could get away with slightly underbidding the government if they had a loyal customer base and offered greater convenience. (After all, hardly anybody enjoys doing "business" with the government.)

Isn't that what the Fed does with treasuries?

Isn't that the reason there's a limit to how much the Fed can actually influence interest rates?  ie, if the rate offered by the Fed approximates that offered by the treasury, then there's no reason for banks to buy their debt.

[MediumTex]

To keep moving merchandise, gold dealers would sell to the government at its high bid price and then turn around and buy from customers at a slightly lower price to turn a profit. They could get away with slightly underbidding the government if they had a loyal customer base and offered greater convenience. (After all, hardly anybody enjoys doing "business" with the government.)

Isn't that what the Fed does with treasuries?

Isn't that the reason there's a limit to how much the Fed can actually influence interest rates?  ie, if the rate offered by the Fed approximates that offered by the treasury, then there's no reason for banks to buy their debt.

I was just citing what the Fed has been doing with QE as an example of how my gold purchase idea isn't as dumb or unworkable as it sounds.

It certainly wouldn't be the dumbest thing the government has ever done.

As I recall, Harry Browne thought that gold confiscation in a fiat currency world would be very unlikely simply because there is no point in confiscating something that has nothing to do with the country's legal currency.

If the argument is that the government would seize citizens' gold as a prelude to going back to a gold standard, that seems sort of far fetched to me.  Where would the political will for such a step come from?  Who would benefit?  Presumably, the elements within the government that would be for a return to a gold standard would NEVER support confiscating gold from citizens as a means of implementing it.

How would gold confiscation be constitutional?  What provision of the Constitution allows the government to seize privately owned gold that has nothing to do with the nation's money supply?

As far as the whole idea of going back to a gold standard, I just don't think that it will ever happen.  It would require too many politicians and bureaucrats to give up too much power.  Those people just don't do that kind of thing voluntarily. 

With all that said, I know that the gold confiscation narrative will never go away.  It's too much fun to think about and discuss.  It's like the monetary equivalent of Bigfoot.

[Tortoise]

How would gold confiscation be constitutional?  What provision of the Constitution allows the government to seize privately owned gold that has nothing to do with the nation's money supply?

If only constitutionality were still a constraint on the Executive branch of the government! As some folks on this forum have pointed out before, holding a copy of the Constitution in front of one's heart does not protect it from a bayonet thrust.

I'm not arguing that an all-out confiscation of gold by the government will ever happen. I just think that if the government were ever to find itself in a situation in which it deemed the confiscation of all U.S. gold to be necessary (perhaps to avoid a run on the dollar), I'm sure it would first (a) manufacture an Oscar-worthy PR campaign to get the sheep riled up against the evils of gold and then (b) promptly confiscate it to satisfy the sheep.

In regards to your statement that the U.S. government could possibly circumvent confiscation of gold simply by offering an above-spot price for it: The point I was getting at was that I think the spot price would simply oblige by rising to whatever price the government sets.

The government would raise their bid, collect some gold, but then spot would quickly rise and the gold inflow would level off. So they'd raise their bid again, collect some more gold, and watch spot quickly rise again as the inflow leveled off. If they were to do this repeatedly, I suspect it would push gold's spot price in terms of dollars into the stratosphere. It's not exactly a result the government wants, because it would alarm the markets and erode faith in the dollar.

If the government were to desire a transition over to a gold-backed currency (for whatever reason), probably the simplest and most elegant way for them to do it would be simply to give our freedom back to us: Allow people to freely choose the currencies that best suit them. Don't force them to use a single currency at the point of a gun. With freely competing currencies sans bailouts by the government, I think you'd very quickly see various gold-backed currencies offered by reputable private businesses rise to the top and become the dominant ones.

[AdamA]

I was just citing what the Fed has been doing with QE as an example of how my gold purchase idea isn't as dumb or unworkable as it sounds.

I know (and agree). 

My question was kind of tangential. 

Is it possible for banks to bid down the price of Treasuries to the point where the interest rates they yield would approximate those offered to banks by the Fed, therefore removing the incentive of banks to borrow from the Fed to buy Treasuries?

[MediumTex]

I was just citing what the Fed has been doing with QE as an example of how my gold purchase idea isn't as dumb or unworkable as it sounds.

I know (and agree). 

My question was kind of tangential. 

Is it possible for banks to bid down the price of Treasuries to the point where the interest rates they yield would approximate those offered to banks by the Fed, therefore removing the incentive of banks to borrow from the Fed to buy Treasuries?

If ever there was a sausage making operation it would be the process by which the Fed buys recently issued treasury debt form the primary dealers.

I don't pretend to understand what all goes into that.

[AdamA]

If ever there was a sausage making operation it would be the process by which the Fed buys recently issued treasury debt form the primary dealers.

I don't pretend to understand what all goes into that.

It's nice to hear someone admit that.  I often hear people discuss it as though it were economics 101, but they can never actually explain the process clearly.

[moda0306]

Adam,

I agree... do any of us any more than guess at how fed accounting and transactions really work?  That's probably a bad thing in and of itself and something the fed should have to address... that so few can understand what's going on.

I'd love to hear the Bernank truly defend to its core the federal reserve system on a few levels, most in terms of who you are truly helping first when you put money into the economy or perform a bailout:

1) Buying junk financial instruments at par value from bad market players
2) Buying treasury bonds first-and-formost from financial institutions (why not directly from treasury during auction or before auction)?
3) Artificially low rates being offered first-and-foremost to financial institutions, hoping they'll efficiently pass that down to the public.
4) Fractional reserve banking allowing banks to leverage at insane levels, with the only cost of that leverage being some FDIC premiums.
5) Why do we need fractional reserve banking at all?  Is it so bad that people pay fees on checking accounts (instead of collect interest (what interest??))?  If they want to collect interest or not pay a fee for holding their money, why not make them actually loan it out or at least enter into voluntary fractional-reserve arrangements?  Would that be so bad?  Shouldn't "savings" actually be savings and not just another form of investment (what it really is when you loan money to someone instead of pay them to store it for you)?  How/why would this be so hurtful to the economy?
6) The morality of the fed, socially engineering its own economic equilibrium based on perpetual growth.  Should not the free interactions amongst a group of people dictate the equilibrium of the economy, and not some higher entity?  Is the instability of this arrangement so bad, or just a natural consequence of free people having to live their lives responsibly?

[AdamA]

2) Buying treasury bonds first-and-formost from financial institutions (why not directly from treasury during auction or before auction)?

This is the one I really don't get.  I almost seems as though this is designed to prevent the kind of "money printing" that the Fed is often accused of engaging in.  

If rates get too low, maybe the banks won't be interested in buying Treasuries, in which case the Fed couldn't buy them back...

I used to think about this all the time, but ever since I started using the PP it's become less interesting.  

Probably only people involved in planning these transactions at the highest levels really understand what's going on...or maybe no one does.

[Lone Wolf]

I'd love to hear the Bernank truly defend to its core the federal reserve system on a few levels, most in terms of who you are truly helping first when you put money into the economy or perform a bailout:

Very insightful list of questions.  Most of the answers to these that I've seen amount to "it's always been this way" or "everybody knows" or "most economists agree", etc.

Those things are nice to know.  They're also not actual "answers".  (And in the case of "it's always been this way", not true.)

This is the one I really don't get.  I almost seems as though this is designed to prevent[/] the kind of "money printing" that the Fed is often accused of engaging in. 

If rates get too low, maybe the banks won't be interested in buying Treasuries, in which case the Fed couldn't buy them back...

The Fed has a trick up its sleeve that makes this work.  The Fed has a set of "primary dealers" that they work with.  A primary dealer gets a front-row seat in dealing with the Federal Reserve as it attempts to influence short-term interest rates.

The requirement for this privilege is that they must participate at Treasury auctions.  Check out this clause from the NY Fed's guidelines for primary dealers:

"the New York Fed will expect a primary dealer to bid in every auction, for, at a minimum, an amount of securities representing its pro rata share, based on the number of primary dealers at the time of the auction, of the offered amount."

In short, they must bid at auction.  That's the price of the ticket to the big show.  It means that no Treasury auction will ever fail (barring some very, very extreme circumstances.)

The NY Fed's policy guidelines for primary dealers gives a lot of good background on how this works.  It's perplexing that the system is this Byzantine.  It doesn't sit well with me that so much unnecessary complexity and obfuscation has been added to money.

[AdamA]

It's perplexing that the system is this Byzantine.  It doesn't sit well with me that so much unnecessary complexity and obfuscation has been added to money.

Very bizarre, but very interesting.  Reading some of this stuff, one can't help but feel that inflation is inevitable...but then I think about some of the points that MT has made about the recent credit bubble bursting, and it seems that deflation is inevitable. 

Maybe the two will just cancel each other out...like mixing cocaine and heroin.

 

[MediumTex]

Maybe the two will just cancel each other out...like mixing cocaine and heroin.

Remember, though, one of our goals here is not to kill the patient.

[moda0306]

Maybe, like mixing cocaine and heroine, we'll have a real awful combination of the two.

Maybe something like housing and wage deflation with natural-resource inflation.

Could you imagine that?

[AdamA]

Maybe the two will just cancel each other out...like mixing cocaine and heroin.

Remember, though, one of our goals here is not to kill the patient.

As long as he has a fun time before his heart stops, it's okay.