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Dear ,
There were some interesting developments in the retirement world this week that I'd like to bring to your attention. One of the most important ones is an update on efforts to possibly nationalize your retirement accounts such as your 401k or your IRAs. As preposterous as the idea once seemed, there seems to be some progress on the issue under the radar.
Government Nationalization of Retirement Accounts: Fact or Fiction?
I first mentioned this issue back in October of 2008 during one of my seminars. I had run across an article in the Carolina Journal. I did a little research and found that there was something to it. I brought it up and explained that while I thought the possibility of it happening was extremely remote it wasn't unheard of. Argentina had done something similar over the previous 10 to 15 years.
What exactly did they do?
Back around 1994 the Argentine government started allowing its citizens a choice. They could stay in the Argentine Social Security System or they could invest their money in 10 private accounts that had been preapproved by the government. Well as you can imagine, over time the private accounts became the preferred option and the investors in those accounts had become some of the biggest investors in the country. Well in late 2008 the Argentine government nationalized those accounts. All of that money went into the coffers of the government.
If on the previous day an Argentine citizen had $100,000 in his or her account, the next day they had ZERO. Instead they had a promise from the government to pay them a retirement check for as long as they lived. And when they died, if there was any money left it went to the government, not to the surviving relatives.
How does that affect us in the USA?
Well there are some interesting parallels going on today. Do I think it is imminent that the government is going to nationalize retirement accounts? No. But there are some things going on that to me appear to be setting the stage for that to happen down the road. There have been two types of new pension or retirement accounts actually proposed in different bills in the last couple of years. While neither one has gained enough traction to win a vote they are both included in President Obama's proposed Fiscal Year 2013 Budget so apparently this is an idea that isn't going away anytime soon. One is the Secure Choice Pension and the other is the Government Retirement Account. Let's take a look at the Secure Choice Pension as proposed by the National Conference on Public Employee Retirement Systems.
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First this plan is only available to companies that don't already have a defined benefit plan. I have not been able to find what companies will be required to offer this or whether it will all be voluntary.
You cannot withdraw money until retirement age which is 65 for everyone.
"SCP would be a multiple-employer defined benefit plan, based on the cash balance model. Each participant's benefit would be expressed as a virtual account balance, reflecting annual contributions made on his or her behalf and earnings credited under the SCP annually."
Did you catch that? You would have a virtual account balance. The money is never really yours. No lump sum payout available at retirement if you would prefer that.
"States would be permitted to use a number of different devices to allocate the risk of underfunding. As noted above, SCPs would be subject to the ERISA minimum funding requirements, and it is anticipated that they would be designed and administered to remain fully funded."
Really? Why would we expect them to be fully funded? The states currently have a combined underfunding of their own pensions to the tune of $1+ trillion. If they can't adequately run their current retirement funds what makes you think they will do anything better with a new fund to run?
"The design would be nimble enough to adjust for changing economic conditions,....."
When is anything this big, whether run by the government or the private sector, ever nimble? Just saying that it will be doesn't make it so.
"The SCP's board of trustees will be subject to the general fiduciary standards of care but not to fiduciary-based lawsuits. However, investment managers hired to manage SCP assets and other vendors performing fiduciary functions for an SCP would be subject to all of the ERISA fiduciary responsibility requirements."
Isn't this par for the course. The politicians have essentially said "If we screw up you can't sue us but go ahead and sue all those other folks out there."
"Virtual Account Balance A participant's virtual account balance accumulates at a rate of 6% of covered earnings plus credited annual interest at a rate determined by the yield on 10 year Treasury bills as of January 1 plus 2%."
How is the state going to magically produce that return? And if they can do it why aren't the doing it right now?
Now let's look at Government Retirement Accounts
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"This paper proposes a rescue plan for the American retirement income security system, based on a mixed system composed of Social Security, employer defined-benefit pension plans, and a new type of personal retirement savings account called a Guaranteed Retirement Account (GRA). This rescue plan will not work without a strong defined-benefit pension system and a strong Social Security system. Tax breaks for 401(k)-style plans and IRAs will be converted into flat tax credits to offset the cost of these new accounts, so the plan will improve the retirement security of most Americans without costing taxpayers more than the current system.
The plan calls for all workers not enrolled in an equivalent or better defined-benefit pension to enroll in a GRA, a plan that borrows the best features of defined-benefit and defined-contribution plans, including guaranteed retirement benefits that last a lifetime, low administrative costs, and steady contributions. With GRAs, workers will accumulate savings in investment funds that earn a 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% of pre-retirement earnings for the typical retiree.
Guaranteed Retirement Accounts eliminate the regulatory and tax law favoritism that not only gives 401(k)-type plans wide discretion and little scrutiny, but does so at the expense of the defined-benefit system."
Let me summarize. The intention is to eliminate the tax deduction for 401Ks and IRAs. Then the intention is to force anyone who doesn't already have a defined benefit pension into a GRA. The GRA will require you and your employer to make contributions and when you retire you can at 10% of your balance as a lump sum and you are forced to take an annuity for the rest which gives you a guaranteed income for life. If you die before collecting any benefits you can pass on half of your account balance to your heirs and the other half goes to the government. If you die after taking benefits you can pass on half of the balance minus benefits already collected.
Here is My Concern
As you can see, both of the proposed retirement accounts don't offer near the flexibility of the 401k or the IRA and seem geared to enrich the government at the end. And once they have these new retirement accounts in place, would it really be that much of a stretch for the government to force us to roll our 401Ks and IRAs into these accounts? It's happened elsewhere; don't think that it can't happen here.
One Final Note On This Issue
One of the selling points for both proposals is that you will get the expertise and management of government pensions at a very low expense. My question is are we sure that is a good thing? Look at the way the Federal Government has run Social Security. Both parties tell us it is going broke. So why would we want them running a second retirement program for us?
In fact here is a graphic of the old three legged retirement stool. In the past one leg was from the government (social security), one leg was a pension, and one leg was personal savings. Now they want 2/3 of your pension coming from the government. Are we sure that is a good idea?
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Apparently some think it is because California is on the brink of being the first state to implement a plan. If Governor Brown signs the bill, private citizens will be able to open retirement accounts with CALPERS, the largest pension plan in the US. With all that size for economy of scale, and the expertise that they have being the biggest, they must offer great performance as well don't they?
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Well would you look at that. Not only is California one of the most underfunded plans in the nation, it is also one of the most underperforming. They returned 1% last year while projecting 7.5% which means they are now even more underfunded.
Government is supposed to be looking out for our best interests correct? Then you might want to ask yourself, why is government trying to coerce their citizens into investing their retirement savings in underfunded and under performing funds? If a private company did that what would it be called?
Until next week , Protect Your Wealth!
Sincerely,
  
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