Democrats Consider Eliminating 401 (k) Tax Breaks

Want a glimpse into what an Obama administration and Democratic-controlled Congress will look at in the area of tax policy? House Democrats are already considering an overhaul of the nation's $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

Republicans are throwing around the "socialist" tag all over the campaign trail when referring to Sen. Barack Obama. But if the Democrats are even considering such a radical plan as to seize private pension accounts, it's hard not to look at Democrats in any other way.

James Pethokoukis of U.S. News & World Report wrote on a congressional hearing in the 401(k) matter:

House Democrats recently invited Teresa Ghilarducci, a professor at the New School of Social Research, to testify before a subcommittee on her idea to eliminate the preferential tax treatment of the popular retirement plans. In place of 401(k) plans, she would have workers transfer their dough into government-created "guaranteed retirement accounts" for every worker. The government would deposit $600 (inflation indexed) every year into the GRAs. Each worker would also have to save 5 percent of pay into the accounts, to which the government would pay a measly 3 percent return. Rep. Jim McDermott, a Democrat from Washington and chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, said that since "the savings rate isn't going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should."

The director of the Congressional Budget Office, Peter Orszag, also testified at the hearing and said that about $2 trillion in retirement savings has been lost over the past 15 months.

Workforce.com explains the rational in the move:

“I want to stop the federal subsidy of 401(k)s,” Ghilarducci said in an interview. “401(k)s can continue to exist, but they won’t have the benefit of the subsidy of the tax break.”

Under the current 401(k) system, investors are charged relatively high retail fees, Ghilarducci said.

“I want to spend our nation’s dollar for retirement security better. Everybody would now be covered” if the plan were adopted, Ghilarducci said.

She has been in contact with Miller and McDermott about her plan, and they are interested in pursuing it, she said.

“This [plan] certainly is intriguing,” said Mike DeCesare, press secretary for McDermott.

Blogger Ed Morrissey of Hot Air notes "that means your employer can no longer write off their contributions to your 401(k), and your capital gains would be taxable year to year. In other words, it becomes just another investment or savings account, with no tax benefit at all, and no employer contribution. Instead, Uncle Sam would give you your “matching” funds — up to a whopping $600 per year! Whoopee!"

This huge disruption of Americans' retirement plans may be only one element of an Obama Administration's tax hike on workers. The Wall Street Journal notes that "the prospect of these tax increases is now hanging over the economy like a pall, as investors and businesses wonder where and how heavily an Obama Administration and Congress would strike."

Here's what the Journal reported Rep. Barney Frank as commenting recently on tax increases:

"I think at this point there needs to be a focus on an immediate increase in spending and I think this is a time when deficit fear has to take a second seat. ... I believe later on there should be tax increases. Speaking personally, I think there are a lot of very rich people out there whom we can tax at a point down the road and recover some of the money."

The Journal then concludes:

Federal budget deficits are not something we obsess about, but eventually this new spending has to be paid for, and Barney Frank's comments only underscore that big tax increases are coming. The prospect of these tax increases is now hanging over the economy like a pall, as investors and businesses wonder where and how heavily an Obama Administration and Congress would strike. The pall is likely to continue well into 2009, as millions of Americans delay their investment decisions until they know how much their after-tax returns are likely to fall.