Will Your Retirement Be Forced to Bail Out Uncle Sam?
By Mark Nestmann
It’s not a popular thing to say, but the US is broke. Busted. Bankrupt. If Uncle Sam were a corporation, it would have been declared insolvent decades ago.
Audited financials from the General Accountability Office prove my point. They show that official US government liabilities come to $21.5 trillion. Total assets, including federal lands, national parks, accounts receivable, and the interstate highway system total a little more than $3.2 trillion. The accounts receivable include about $1 trillion or so in student loans – more than 10% of them in default. (And yes, they’re actually listed as an “asset.”)
In case you’re counting, that gives the federal government a net worth of negative $18.3 trillion. (Yes, with a ‘t.’)
But these numbers are just the tip of the iceberg of the federal government’s dismal fiscal condition. Boston University Professor of Economics Laurence Kotlikoff has calculated an incredible $222 trillion “fiscal gap” using figures provided by the Congressional Budget Office. Kotlikoff’s analysis takes into account future projected government expenditures for unfunded mandates like Social Security, Medicare, and military and federal pensions. It then subtracts the projected taxes to be collected to arrive at $222 trillion. And that doesn’t include the cost of the wars many of our presidential candidates are itching to start in the Middle East.
Where will the money come from to pay the bills? One pool of capital that’s a tempting target is your IRA, 401(k), or other retirement or pension plan. Americans have socked away more than $19 trillion in IRAs, 401(k) plans, defined benefit plans, annuities, and other private retirement plans. That’s a lot of dough.
This isn’t some doomsday prediction… it’s happened many times before:
•In 2001, Argentina confiscated more than $3 billion of pension savings. Then in 2008, it nationalized another $24 billion in private pensions.
•In 2009, Ireland seized $5.5 billion from its pension reserve fund to bail out its banks and another $3 billion in 2010.
•In 2010, Hungary gave its citizens a Hobbesian choice: give us your private pension fund assets or lose your right to a state-funded pension. The government tried to collect nearly $15 billion with this gambit.
•In 2013, Poland transferred more than $37 billion in pension assets from private hands to the government. Poland justified the seizure by stating the funds were already invested in government bonds. Naturally, it claimed the government could administer the funds more safely than the private sector.
•In 2014 and 2015, Russia seized its citizens’ pension contributions for those years. This amounts to a total of as much as $52 billion in pension savings.
Think it can’t happen here in the good ol’ Red, White, and Blue? It already has. In 1995, the Secretary of the Treasury dipped into two trust funds held for civil service employee pensions to fund government expenditures. At the time, Congress and the president were at loggerheads over the federal budget, with President Clinton vetoing an increase in the federal debt ceiling. Thus, you could argue this was a special circumstance. Still, it sets a highly worrying precedent.
And for those of us with long memories, it’s hard to forget a proposal from Alicia Munnell, former director of research for the Federal Reserve of Boston. In 1991, Munnell proposed stealing (or, as I’d say in polite conversation, “taxing”) 15% of retirement assets to help fund a mandatory pension scheme.
Then there’s the 2014 report from the International Monetary Fund (IMF), warning wealthy countries that they need to grab more of their citizens’ wealth to deal with escalating debt and avoid economic collapse. It proposed a “one-off capital levy” – outright confiscation – of 10% or more of private savings to help fund cradle-to-grave welfare states.
Now, Congress and the president would love to confiscate your retirement funds, but it’s not exactly politically expedient to do so. What they are doing, though, is putting the squeeze on them. For instance, President Obama wants to limit the size of IRAs to $3.4 million; the IRS is disqualifying an increasing number of retirement plans due to “prohibited transactions” in the plan; and now, a new source of pension funding for Congressional boondoggles may become available.
A report released March 1 by the influential duo of labor economist Teresa Ghilarducci and Tony James, president of Blackstone Group LP, proposes that every worker in the US have their own “Guaranteed Retirement Account,” or GRA. To fund the GRA, employers and employees would each contribute 1.5% of employees’ salaries into a federally operated investment exchange. Investment managers would compete to manage the funds, supposedly to keep returns up and costs down.
At age 65, whatever funds had accumulated in a worker’s GRA would be annuitized, and the worker would receive a monthly payout for life from the Social Security Administration.
It’s a clever proposal if you accept the premise that employers and employees should have additional money siphoned away to fund a government mandate. Already, employers and employees must each pay 6.2% of workers’ salaries into the Social Security system. Then there’s Medicare, with another 1.45% mandatory contribution from both employers and employees. Ghilarducci and James would add another 1.5% to these totals, which of course don’t include withholding for federal, state, or local taxes.
If this plan becomes a reality — and it may, as it has influential backers in both major parties — how likely do you think it is Congress will resist the temptation to tap GRAs for its own purposes? That’s exactly what’s happened to the nonexistent Social Security trust fund. In reality, there is no trust fund — only an obligation backed by IOUs to pay off tens of millions of retirees in the years ahead.
Personally, I think it’s far more likely GRAs will become another piggy bank — ATM may be a better analogy — for Congress to loot. Your retirement funds will be used to prop up dictators in the Middle East, research how people find love (or lust) on the Internet, or on any other purpose legislators find politically expedient.
I’m not predicting an outright confiscation because that would be politically disastrous. Instead, what I think will probably happen is Congress will mandate that a portion of private retirement assets be held in long-term government bonds. That percentage would gradually go up as Congress discovers new things on which it needs to spend money.
The only way out of this mess it to keep as much money as you can out of the clutches of the US government. That means offshore investments, holding gold in secure international private vaults, and saving as much after-tax money for your retirement as you can possibly afford.
Incidentally, I don’t advocate cashing out retirement plans, especially if you’re under 59½ years old. That triggers a 10% early distribution tax, plus you’re taxed (in most cases) on the entire value of the plan. Just don’t place too much confidence in receiving 100% of the value when you actually need the money.