Work 'til you drop
Congress, after a record-length continuous session, finally adopted a landmark bill, accomplishing comprehensive entitlement reform. The occasion was momentous, for there had at first been little hope of statesmen overcoming the years and decades of bitter partisan rancor. The bill, entitled “Retirement Reform, Debt Reduction and Retirement Account Choice Act” passed by a margin of 250 votes for, 53 against and 43 abstentions, and was signed immediately into law.
Citizens would no longer have to be at the mercy of “ruthless, opportunistic, stock-shilling and mutual-fund-pushing wealth managers”. No longer would they have to live in fear of money market accounts breaking the buck, investment funds going bankrupt. Counterparty risk would soon be a thing of the past. Social Security would henceforth maintain actual, individual accounts in all participants’ names, and would contain only the highest grade of domestic government bonds guaranteed to meet or exceed the rate of inflation.
“A comprehensive victory for progressive democracy”, declared the Speaker.
“Senior citizens can finally rest easy, and peacefully enjoy the well-deserved rest of retirement without fear of losses in the stock market, or the bursting of economic bubbles such as real estate or dot-com.”*
After the passage of the bill on December 13th**, citizens have to actively submit a petition to the Social Security Administration that they wish to RETAIN their employee-sponsored 401(k), retirement fund, pension fund or other tax-deferred employment-related retirement savings account -- by the deadline of January 31st. All accounts for which such petitions are not submitted will be liquidated, and their balances debited into the Social Security Trust.
Those who choose to retain their non-SSA accounts may do so. However, they will thereby be disqualified from further participation in the Social Security system, eventual payments upon retirement would be calculated based on years worked prior to passage of the bill. They will, of course, still be subject to PAY the Social Security tax on any and all earnings. For the interim period, while the individualized SSA accounts are being set up, the retirement contributions to ALL retirement accounts will be fixed at 10% of gross wages, and will be collected by the SSA for the next 12 months.***
Sounds like a good deal, don’t it? No need to worry about which mutual fund to pick. No headaches about whether you can buy HUI or short bonds. No need to worry your pretty little head about anything, your friendly benevolent government will take care of EVERYTHING for you. It’s Guaranteed by the Government ™. And of course, for those who so choose, individual IRAs and Roth IRAs are still available. For now…
*- quotes from politicians may have been dramatized recreation of the original
***- or until individualized SSA accounts are established and operational, whichever comes later. The individualized Social Security Savings Accounts are still „under construction”, pending „data harmonization”. So the Treasury automatically collects ALL retirement contributions deducted from gross wages. It's keeping those funds safe since January of 2011.... In the general budget.
The situation described above, has not (as yet) taken place in the US, but it is very real. It is the reason my mother (and anyone with half a brain in her generation or younger) realizes that there is no reasonable expectation of an actual pension or social security payment for ANYONE in certain countries.
The details described above (though the quotes are fictitious) are from the Hungary of 2010, and the upstanding leader who made all this possible was this guy (yes, he too had a stint as community organizer at one point, and is another one of those lawyers giving the legal profession a bad name):
(EDIT: more famous youthful portrait added for reference and comparison. Perhaps there is a lesson to be learned here regarding fascination with straw hats, demagoguery, smoking implements, narcissism, oral fixation and political success.)
The Poles apparently caved and followed suit late last year. Whether the current Prime Minister was in any way influenced by the sudden death of the previous president (and a large group of senior government officials incl. central bank chairman) in a tragic plane crash on approach to Russia will perhaps never be known. That was most assuredly just that, a tragic accident. But the fact remains that Mr. Tusk did implement a partial nationalization just a few months ago in Poland.
(EDIT: the less favorable portrayal seems to indicate that the subject is 'loyal as a dog'. Ghost in upper right is Jaruzelski, the last [openly] Communist premier of Poland)
The list is becoming quite impressive, and very rarely/lightly covered in media outside the target country.
2009: Ireland took Euro4.4bn National Pension Reserve Fund assets to bail out banks
2010: Portugal nationalised pension assets of Portugal Telecom
2010: Ireland took remaining Euro 2.5bn National Pension Reserve Fund assets
2010: France took Euro33bn from its National Reserve Pension Fund
2010: Hungary nationalised individual private pension accounts to reduce state debt
2011: Portugal confiscated pension assets of its largest banks
2012: UK took £24bn of Royal Mail pension assets and reduced current budget deficit
2013: Poland nationalised half private pension assets by confiscating bond holdings
Not to be outdone, Russia is 'temporarily seizing' private pension assets while it conducts an 'audit' and an 'inspection' to ensure that money held in these private funds is 'safe'. Supposedly there will be a 2-year transition period, during which private retirement funds must reorganize to be publicly listed stock companies. Good luck with that, guys...
For what it’s worth, the current status of the same system is very different in the US, and (presumably) other Western societies – though I have little direct experience with the Canadian, UK, German or other continental EU systems. There appears to be a stronger protection of individual property, there are broader options, the government plays a lesser (or no) role in the administration of retirement funds.
But the act of confiscation is almost NEVER called confiscation. It merely becomes punitively unprofitable to keep your savings in a non-state-mandated plan. The private plans can be legislated out of existence, and all other options besides investing them in government bonds in a government account are generally made extremely unattractive. Say, the current 10% penalty and full income tax payment upon early withdrawal is changed to a 35% penalty. Or a 50% penalty. UNLESS one rolls it over to a new-and-improved-and-expanded myRA.
After the lackluster initial participation rates, negligible deposit amounts and abject failure of the program, it will be established by a special panel that the problem is not that it lacks compelling value – the problem is that the program is not large enough, accommodative enough, subsidized enough, mandatory enough. In this aspect, I find it similar to the Afforable Care (and Patient Protection) Act – once its status as a non-starter is established, a doubling-down is far more likely than a rollback.
Dodging healthcare coverage will be akin to skipping out on child support or state tax payments (anyone else notice state treasuries becoming DESPERATE in recent months/years to whack current and especially past residents with claims of unpaid back taxes?). A lack of contribution to a retirement savings plan can be similarly cast in a negative light. Proposals praising the economies of scale that could be achieved by merging pension systems into a single, massive, Treasury-administered and guaranteed structure may seem like an outlandish proposal now.
But just think about what the landscape might look like as the already-underwater state- and union pension funds, as well as individual 401(k) accounts go through another elevator ride down. Last time, the S&P more than halved from the 2008 high above 1400 to 680-ish. If the index begins a near-vertical dive from the current 1800+, how low will it have to go before emergency legislation is proposed to ‘save the retirements!!!’ by converting them ALL to .gov-guaranteed accounts, and even restoring them to some balance/date combination?
Will 1200 be enough? 1000? 650?
Relying on the honesty, integrity and capability of politicians and bankers may not always be the most fruitful approach – unless one is among them, and gets to share in the spoils.
If you have capital, try to put it to work in a productive business. Buy land, buy rent-producing real estate (or at least buy ‘rental rights’ to said real estate/land in a jurisdiction where the 'rent' of property taxes is manageable). Build a garden, a windmill, a solar array or a well. Buy a nice necklace for the wife, or bracelet for the husband. Make sure your pantry is well-stocked, toolshed equipped, armory diversified. Definitely continue your midnight gardening as well. Whatever you buy (or think you bought), never forget that possession is 9/10th of the law. And yes, that does mean physical possession.
Keep stacking. Go Seahawks.