Forced Retirement Account Confiscation

[TripleB]

I have a prediction. Sometime in the next few decades, the US government will decide all retirement accounts need to be taken public. The government will seize all assets (phased in over a period of time, not outright), "deposit" them in a federal account, and promise a guaranteed inflation adjusted return.

There's been outcry around 2009 to do something like this when people lost 60% in their 401ks. Some were clamoring about how big of a tax-loss it is to the US government to issue deductions on retirement accounts when people are losing money in them due to the risky stock market. "We're spending all this money issuing tax deductions for accounts that fall in value and leave people unprotected in retirement."

These same people argued that the government should create a guaranteed retirement account that offers a guaranteed inflation adjusted return on assets of a few percent.

Combine this idea with the fact that most Americans rely on Social Security for retirement and the average 50 year old American has under $50k in retirement accounts. Also add in Social Security is pay-as-you-go and the government will be unable to sustain these payments for much longer.

We'll have an environment where most people don't have much in retirement accounts. Only "special interests" will have "significant" assets in their accounts like the small percentage of the population that is responsible people.

It will be easy to get 90% of the population to argue for confiscating the retirement assets of the few, for the benefit of the 90%, and they will argue it's not the same as confiscation because they'll issue IOUs to people who's assets got gobbled up into the national fund.

The people with only $50k in their 401ks/IRAs will be thrilled by the possibility of transferring their money into this national fund that offers promises of a bigger return.

Of course the people with $200k+ in their accounts will get hosed because they will no longer be allowed to touch the money before retirement age (unlike now where you can take out Roth contributions penalty free and use some of the assets towards things like grad school or first home purchase).

Also, people will get hosed when they raise the retirement age because it won't be sustainable to keep it at 59.5 for 401ks/IRAs.

And finally, they will fudge inflation numbers so the return will be significantly worse than what's promised.

I can't envision the government outright seizing assets, but I can see them doing the following:

2 year "grace period" to do whatever non-retirement things you were going to do like withdraw money for grad school or buy a home. After the grace period, anything left automatically gets pulled into the federal fund

You get IOU credits based on how much you "contribute" (aka get seized) - so if you had $200k you will get more in retirement than someone with $50k... of course it won't be linear because you don't need 4x as much as that person. You might get 2x as much payout for 4x the contribution - just like Social Security works today.

The government will tout this as a way to free ourselves of foreign dependency. Why borrow money from China and let them have leverage over us, when we can borrow money from ourselves? i.e. this money will fund some treasury bonds.

I don't see this happening within the next 10 years but certainly 20 to 30 years when things get much worse than they are now and public sentiment goes further against the "rich" like people with $200k in their 401k.

[Pointedstick]

Could be. A lot can happen in the next 30 years. I don't think anyone in 1980 expected 7 year-olds with smartphones.

[FarmerD]

During the VP debate I heard Biden accuse Ryan of wanting to privatise Social Security(Ryan does want this).  Biden is playing on the typical American voter ignorance since a majority of people (according to polls) agree with him.  Can anyone offer a coherent rationale for NOT privatising Social Security?  Would you prefer to control own retirement accounts or would you rather let some political hack control your money for you?

Or better yet, why not just end the giant ponzi scheme called Social Security and let everyone keep and spend or save their own money as they see fit.   

[Pointedstick]

I think there are always going to be more people who want to be taken care of than people who want to take care of themselves, and so a big, safe-looking, Social Security-like program will probably always have appeal. I wouldn't have any problem with it as long as it was an opt-in/opt-out program. Forcing everyone to participate just seems unfair.

[FarmerD]

I think there are always going to be more people who want to be taken care of than people who want to take care of themselves, and so a big, safe-looking, Social Security-like program will probably always have appeal. I wouldn't have any problem with it as long as it was an opt-in/opt-out program. Forcing everyone to participate just seems unfair.

Unfortunately, you may be right.  Many people would prefer to be a zoo animal rather than a free range animal.  Zoo animals are kept locked in a cage, and live a very regimented controlled life.  Free range animals do as they please and have to  accept responsibility for their actions.  They usually thrive though they occasionally starve. 

[Pointedstick]

That's sort of a jaded way to put it. Everyone is just different. We're all the weird ones here for our extreme desires for independence and freedom. Most people I know just don't desire those things as much as I do. Now in my opinion, that causes them to lead more fragile lives, but it doesn't make them bad people.

[murphy_p_t]

I wouldn't have any problem with it as long as it was an opt-in/opt-out program. Forcing everyone to participate just seems unfair.

Kind of like the recent ruling by the "supremes" that the obamacare mandate to purchase insurance is constitutional.

[Pointedstick]

Constitutional law is a joke. The court is a political body, so of course they're going to return bad results most of the time. A country ruled by a representative government lives or dies by its legislators. The court always disappoints in its self-appointed job to throw out their worst excesses.

http://faculty.msb.edu/hasnasj/GTWebSite/MythWeb.htm

[MachineGhost]

I think there are always going to be more people who want to be taken care of than people who want to take care of themselves, and so a big, safe-looking, Social Security-like program will probably always have appeal. I wouldn't have any problem with it as long as it was an opt-in/opt-out program. Forcing everyone to participate just seems unfair.

Technically, it is opt-in, but the way private employers enforce the system backed up by unlawful lies and propaganda from the IRS, it is de facto mandatory.  You used to be able to write "RELIGIOUS OBJECTOR" in the SSN spot on job applications, provide sworn opt-out affidavits, because employers are only required to deduct SSA on "covered employees" and becoming covered is a voluntary act.  There were a few other methods to circumvent it also.  One of the easiest was non-reportable corporation to corporation payments but that got patched in the 1099 reforms last year.

Written law really means very little at the end of the day...  whatever is de facto public policy is THE LAW.  I lay almost all of the blame at Milton Friedman's feet for coming up with the temporary Victory Tax withholding during WWII that was never repealed and morphed into income tax and SSA withholding.  The difference between a true libertarian a traitorous shrimp like Friedman (sorry, BearBones!), is the latter is a Republican-in-the-closet masquerading as one.  I won't apologize for calling out inconsistencies in those overglorified as idols of freedom and liberty.

[FarmerD]

Pointedstick,
Of course it doesn't make them bad people.  Call me jaded or realistic, I just feel there is general aura of nonresponsibility in our society now.  

- Senior citizens who saved no money then whine they can't live on social security alone.  It never occurs to these people that They are responsible for their own retirement monies

- College kids who graduate with some goofball degree then wonder why they can't start out with a high paying job.  These kids live at home with their parents for years because they won't take a low paying entry level job.

- I personally know several families who refuse to purchase health insurance but somehow have money for a Ford Escalade, wide screen TV, and vacation trips.  Yet when one of their family gets sick, they'd expect people to donate money to them.

Everyone can live their lives anyway they want but don't expect me to foot the bill for their chosen lifestyle.  

Coming to this forum and conversing with people who actually manage their own lives responsibly is so refreshing after being around people constantly who don't.

[FarmerD]

Constitutional law is a joke. The court is a political body, so of course they're going to return bad results most of the time. A country ruled by a representative government lives or dies by its legislators. The court always disappoints in its self-appointed job to throw out their worst excesses.

http://faculty.msb.edu/hasnasj/GTWebSite/MythWeb.htm

Activist judges can interpret the Constitution any way they want.  This mean, in effect, the Constitution is a meaningless document anymore.  What started out as three branches of government that would enforce the concept of checks and balances is now really just a hodgepodge of moving political forces.

[MachineGhost]

Activist judges can interpret the Constitution any way they want.  This mean, in effect, the Constitution is a meaningless document anymore.  What started out as three branches of government that would enforce the concept of checks and balances is now really just a hodgepodge of moving political forces.

Activist judges aren't responsible for our downfall though.  Its unengaged judges that kowtow to the legislature and executive branches.  They simply don't uphold the Constitution and that is not activism.

[TripleB]

I wouldn't have any problem with it as long as it was an opt-in/opt-out program. Forcing everyone to participate just seems unfair.

That never works. Only people who know they will be poor will opt-in, while people who have assets will opt-out. You need to subsidize the weak off the strong for one of these programs to "work." It's the economics issue of "moral hazard".

[Pointedstick]

I wouldn't have any problem with it as long as it was an opt-in/opt-out program. Forcing everyone to participate just seems unfair.

That never works. Only people who know they will be poor will opt-in, while people who have assets will opt-out. You need to subsidize the weak off the strong for one of these programs to "work." It's the economics issue of "moral hazard".

I think you may be overestimating people's rationality. Us libertarians will certainly opt out, but I really doubt most people have the confidence in their own abilities, or else they are hobbled by collectivist dreams. My parents are a good example in that they both are fanatical believers in Social Security yet have substantial retirement savings. They just really like the whole socialist welfare aspect of it.

So I suspect nearly all liberals would remain in the system. Of the conservatives, I think most would also stay in out of fear that their investment efforts failed, or as a safety net in case they did. That's still a pretty big pool.

[craigr]

The account seizing could happen, happened in other places. One reason why I don't advocate keeping all your money in tax-deferred accounts.

However I will say that if the govt. offered a national program with funds like they get with the TSP it would be a huge improvement over what most people get now in their IRAs and 401(k)s. The TSP is probably one of the few government programs that they actually got mostly right. It offers a few funds with low expenses and are broadly diversified.

Not that the above will ever happen, but it would definitely be better than what most people have now, sadly.

[Reub]

I really don't see the need for account seizing when they can just print more money which has the effect of reducing the value of what you have saved in real terms.

[moda0306]

I really don't see the need for account seizing when they can just print more money which has the effect of reducing what you have saved is worth in real terms.

Exactly.  There are a lot "softer" ways for the government to coerce us than by doing drastic and unpopular things.  For instance, the government doesn't really "means test" social security, except they do, because they tax $40k of social security somewhere between $0 and $15,000, depending on your "means." 

It'd be a lot easier, someday, for the government to simply count Roth IRA distributions against this calculation, rather than means testing SS or taxing Roth distributions.  I mean at some point we have to realize that the government "could" nuke every large city in America if it wanted to... and maybe it pays a lot more to focus on the back-door ways the government might screw up our lives rather than the front-door ones... or maybe (gasp) that we're remarkably free and live in a wonderful country with a ton of opportunity in which we are probably doing our one-and-only lives a disservice by worrying about every bad thing that might be done to us, and over-exaggerate the injustices we're already living through.  That seems to me to be the Harry Browne way of handling this.

Sorry for the soap-box.  Rant: complete.

[MachineGhost]

That never works. Only people who know they will be poor will opt-in, while people who have assets will opt-out. You need to subsidize the weak off the strong for one of these programs to "work." It's the economics issue of "moral hazard".

Behavioral economics indicates they won't even opt-in.  But, I do advocate we have an opt-out or full privatization choice.  SSA is a very poor ROI for those smarter than the average bear.  Again, Australia is the world leader in providing a patriarcherical, fully-funded, private market social security scheme.  Why don't we imitate them?

[MachineGhost]

Exactly.  There are a lot "softer" ways for the government to coerce us than by doing drastic and unpopular things.  For instance, the government doesn't really "means test" social security, except they do, because they tax $40k of social security somewhere between $0 and $15,000, depending on your "means." 

I hear this thrown around lot and have probably even used it myself, but what exactly would "means testing" mean?

[Pointedstick]

Exactly.  There are a lot "softer" ways for the government to coerce us than by doing drastic and unpopular things.  For instance, the government doesn't really "means test" social security, except they do, because they tax $40k of social security somewhere between $0 and $15,000, depending on your "means." 

I hear this thrown around lot and have probably even used it myself, but what exactly would "means testing" mean?

Telling wealthy people that they don't get any of the money that was taken from them by SS taxes. Basically their ROI would be negative.

[D1984]

Behavioral economics indicates they won't even opt-in.  But, I do advocate we have an opt-out or full privatization choice.  SSA is a very poor ROI for those smarter than the average bear.  Again, Australia is the world leader in providing a patriarcherical, fully-funded, private market social security scheme.  Why don't we imitate them?

During their switch (from a pay-go system to superannuation) how did they handle the transition costs? My understanding was that it required a decent-sized increase in both employer and employee payroll deductions (or contributions, or taxes, or whatever you want to classify them as). How would we handle the costs of such a switch (the costs result from the fact that each generation currently pays for the generation/s that retired before it whereas in a system like Australia's each generation basically saves to pay for its own costs)? We essentially had a "free-rider" first generation who got SS but never had to pay (or paid very little) for a preceding generation's costs and each generation has henceforth paid not for itself but for the previous one; the transition costs to make up for this will be around $4 trillion or more (to set aside funds for the generation that hasn't "built up a reserve" for itself because they were busy having their FICA taxes go towards the retirement of someone else's generation, who were in turn unable to build up a reserve because they were busy having their contributions go to the preceding generation, and so ad infinitum). Someone's going to get hosed.

[MachineGhost]

In a pure pay-as-you-go, it appears the sucker generation would have to pay twice, but the transition costs can be extended out to such an extent (60+ years) so that the burden is the same as presently, but at half the cost to government for delivering the same benefits.  Australia actually has three components:

* A safety net consisting of a means-tested Government age pension system
* Private savings generated through compulsory contributions to superannuation
* Voluntary savings through superannuation and other investments

As a result, Australia is the largest "shareholder society" in the world.  USA is all hat, no cattle.

There are some interesting alleged negative effects to forced social security, such as this constitutional argument:

The argument determines that it is fiscally irresponsible to deny Australians the right to determine in full how their income will be used, spent or saved, and that Mandatory contributions result in low rates of home ownership, increased rental properties as opposed to home ownership, higher dependence on welfare and pension payments and an overall lower quality of life. There are currently a number of action groups attempting to garner public persuasion in order to change the law in order to allow an opt out for mandatory contributions.

[AgAuMoney]

Written law really means very little at the end of the day...  whatever is de facto public policy is THE LAW.

100% agreement!  And almost all "law" is today in the form of regulations written as well as enforced by the executive branch.  The supreme court refuses almost all cases that question this because of various technicalities.

I lay almost all of the blame at Milton Friedman's feet for coming up with the temporary Victory Tax withholding during WWII that was never repealed and morphed into income tax and SSA withholding.

Of course income tax and SSA predate the Victory Tax, but Friedman put the final nail in our coffin with the withholding.

I have no apologies for it, but I really wish we hadn't found it necessary and I wish there were some way of abolishing withholding now.

[Gabe]

I have a prediction. Sometime in the next few decades, the US government will decide all retirement accounts need to be taken public. The government will seize all assets (phased in over a period of time, not outright), "deposit" them in a federal account, and promise a guaranteed inflation adjusted return.

This seems extremely plausible. As a 22 year old who has pretty much the extent of his savings in a Roth and who's working hard to max out annual contributions, this really, really concerns me.

Given your prediction, what's your chosen course of action? The tax benefits of a Roth are ridiculous, but only if this doesn't happen.

I'm wondering whether I stay the course with the Roth or accept the government nibbling on my assets in order to stash them somewhere safer.

[Pointedstick]

I have a prediction. Sometime in the next few decades, the US government will decide all retirement accounts need to be taken public. The government will seize all assets (phased in over a period of time, not outright), "deposit" them in a federal account, and promise a guaranteed inflation adjusted return.

This seems extremely plausible. As a 22 year old who has pretty much the extent of his savings in a Roth and who's working hard to max out annual contributions, this really, really concerns me.

Given your prediction, what's your chosen course of action? The tax benefits of a Roth are ridiculous, but only if this doesn't happen.

I'm wondering whether I stay the course with the Roth or accept the government nibbling on my assets in order to stash them somewhere safer.

I'd say hedge your bets by accumulating assets outside of the Roth as well. You'll have to eventually, since you'll soon outgrow the 5k per year Roth cap and will need somewhere else to put the extra savings.