How long before Uncle Sam hits private pensions to balance the public budget? It’s quickly becoming a reasonable question to ask.
Treasury Secretary Timothy Geithner is ringing alarm bells across Washington, D.C., warning of a disastrous outcome if an agreement to raise the debt ceiling is not made soon. “A default would call into question, for the first time, the full faith and credit of the U.S.
government,” Geithner wrote in a letter Friday to Sen. Michael Bennet, D-Colo.
After weeks of such warnings, the United States has hit its $1.43 trillion debt ceiling hard. In response, GOP leaders have demanded cuts in federal spending equal to any increase in the limit while maintaining a strong line against tax increases.
As Congress squares off over a debt ceiling vote, Treasury is scrambling to find cash in the couch cushions. One of the ways it will scare up extra money is by putting off saving for the retirements of federal workers — in effect, short-term “borrowing” from public pension funds.
By suspending investments into the civil service retirement and disability fund, as well as putting off reinvestments into another big retirement bucket known as the G-Fund, Treasury could “claw back” up to $202 billion, estimates Reuters. That sounds like a lot, but it’s just 10 percent of the $2 trillion the agency says it needs to stay afloat until after Election Day 2012, and it will have to be put back.
Holding off public pension payments could be cast as prudent short-term scrambling to avoid a serious problem with U.S. Treasury holders. Taken another way, such moves could instead be seen as the first step toward an eventual tax or outright seizure of private savings in tax-favored retirement plans.
It can’t happen here, you might say. But it has happened in plenty of indebted countries, such as Argentina and Hungary, and it just happened last week in Ireland. Hungary seized $14 billion from private pensions, reported The Christian Science Monitor, while Bulgaria and Poland demanded partial government control of private savings.
Earlier, Ireland dipped into state pension funds to bail out banks and, more recently, finding itself unable issue new debt, the Irish finance ministry announced it would tax private savings at a rate of 0.6 percent of assets over a four-year period, a decision it expects to raise $668.2 million per year.
So what “deep pockets” could Treasury and Congress target in the coming years? Hold on to your hats.
Despite reports that Americans are woefully unprepared for retirement, Americans with access to private 401(k) plans have been good about saving. Americans held $3.1 trillion in 401(k) plans as of Dec. 31, according to the Investment Company Institute.
Fidelity Investments, which manages 11 million participants in 16,500 employer-sponsored plans, says savings are at the highest level in years. The average account balance is at $74,900, up 12 percent from the previous year and at an all-time high, Fidelity told Bloomberg News.
Vanguard Investments said of its 3.5 million participants' average account balances hit $79,077 recently. For long-term savers, the average was higher, Fidelity noted, at $191,000 for those who had saved for 10 continuous years and $233,800 for those over the age of 55 who had saved for 10 years consecutively.
While those savings are technically tax-free until their holders take distributions, the government could easily force earlier distributions and then simply tax them more heavily. Currently, the “minimum required distributions” age is 70½. That affects all IRA-type funds except tax-free Roth IRAs, including SEP and Simple IRAs commonly used by small business owners.
Potentially, the deal on Roth IRAs could be undone, too. Megan McArdle at The Atlantic believes both traditional IRAs are in danger due to normal tax increases and that tax-free Roth accounts eventually will be tapped, too. The government raised the income limits for conversions of Roth IRAs and fearful Americans responded. Conversions subsequently spiked fourfold in 2010, Fidelity Investments said in February.
That means a short-term spike in tax collection as people pay for the conversions now but then tax-free growth for years to come — unless Uncle Sam gets desperate.
“I think that Congress is going to go after all of it,” McArdle writes. “But Congress doesn't have to do anything special to get money out of traditional IRAs; it just has to raise income taxes. (401ks and traditional IRAs are taxed at ordinary income tax rates). Roth IRAs, on the other hand, represent a sizable pool of tax-free assets.”
Congress might end the tax break on municipal bonds, too. As Jason Zweig at The Wall Street Journal points out, the muni bond tax break has been a perennial target of politicians over the years.
Now, the idea of removing the tax break — a major support for retiree income — is on the table. The recent Obama deficit commission brought it up. The Congressional Budget Office figures killing the tax exemption would save $143 billion from 2012 to 2021.
It seems something has to give. Angel Gurria, Secretary General of the Paris-based Organization for Economic Co-operation and Development (OECD), recently warned that the developed countries face a “Mount Everest” of debt that will take a generation to unload.
“We have unsustainable deficits throughout the OECD countries. And that includes the United States and that includes Japan. That includes the whole of Europe, practically the whole of Europe,” Gurria told CNBC.
Growth will continue, Gurria said, and countries will begin to address their individual problems, but the really tough decisions are still years away, he warned, as legions of workers in the biggest economies quit work and begin to draw promised pensions and health benefits.
“We’re going to find ourselves in a very uncomfortable situation in two, three, four years' time. Then we’re going to have to come down from there, and by that time, we’re going to have the aging process come in. So, it’s going to take a generation to get out of this situation of the debt in the OECD countries.”
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