The federal government covets my 401K

Originally posted by me elsewhere on Oct. 13, 2010.

Yesterday I posted a status update about a recess hearing in which senators heard testimony about the pros and cons of having the federal government confiscate money from 401K plans in order to cover the shortfall in union pension funds. The article that I read was New Lame Duck Threat to Bailout Union Pensions published at Human Events. What I read there was alarming enough that I tried to find out more today. As it turns out, I was unable to find any information supporting the contention that the government was considering using money in private 401K plans to bail out union pension plans. In fact it seemed as though the Human Events article was confusing two distinct proposals.

  1. As previously reported by Human Events, Democratic Sen. Bob Casey of Pennsylvania wants to bail out underfunded, union pensions. I have been unable to uncover how Casey proposes to raise funds for this bailout. Perhaps Human Events is correct in believing that he wants to take the money from 401K funds, but I could find no outside confirmation of this.
  2. A different proposal is under consideration to replace 401K and IRA savings plans with a new federal pension plan. A professor by the name of Teresa Ghilarducci is spearheading this effort. Her proposed alternative to the 401K is called the Guaranteed Retirement Account (GRA).

Teresa Ghilarducci first proposed the GRA plan during a hearing of the Education and Labor Committee held October 7, 2008. The full transcript of her deposition at that hearing is available at Her proposal to replace the current system with a GRA plan has been tossed about repeatedly by legislators, suggesting that they are seriously considering turning it into law.

This is what I was able to cobble together about the proposed plan by looking at both the deposition cited above, and by a summary of the proposal’s highlights that I found at Retirement Plan Tips.

  • Eliminate tax breaks for 401k and IRA savings plans
  • Mandate that 5% of each worker’s pay be deposited into a GRA; unlike the current 401K and IRA savings plans, the 5% contribution won’t be deducted from the person’s income prior to assessing his income tax. BTW you are still expected to pay taxes toward Social Security and Medicare.
  • Employers would also contribute to the plan without getting any tax write off for doing so. I couldn’t find out how much the employer is supposed to be contributing.
  • No early withdrawal, even with penalties, no matter what kind of financial crisis you’re facing.
  • Unlike the current retirement savings plans which allow an individual to bequeath his retirement savings, here’s what you would be allowed to bequeath of your GRA:
    • If you were to die before retiring, you could only bequeath half your retirement savings.
    • If you were to die after retiring, you could only bequeath what you contributed plus interest.
  • While still working, you would be taxed for the capital gains which your GRA accrued that year.
  • Federal government would pitch in $600 per year (inflation indexed); the federal government will acquire the revenue for this contribution by ceasing to offer tax breaks on retirement accounts.
  • An agency of professional investors under the auspices of the Social Security Agency would invest GRA contributions in a range of assets.
  • The retiree would get payouts for life; the GRA would never be exhausted.

There is an online interview of Mark Levine and professor Ghilarducci that I highly recommend. His critique of the GRA plan was both devastating and entertaining. The mp3 is here.

I read elsewhere discussions of possible methods that the federal government could use to transition people who currently have a private retirment savings plan into the GRA payout system. One proposal I read was that when people retired, they would automatically be put into a GRA payout scheme, even if they had their own 401K or IRA. Then if they didn’t opt out of the GRA payout scheme within some pre-defined time period, the federal government would basically confiscate their individual retirement savings accounts and continue providing GRA payments for the rest of that person’s life.


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