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On the Road

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Name: Jack Neefus
Gender: Male
Hometown: Newark, NJ
Home country: US
Current location: Baltimore, MD
Member since: 2001
Number of posts: 20,579

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Email: jneefus@gmail.com

Journal Archives

Sorry to Critical of the Article You Posted, Xchrom,

because it raises a legitimate issue that is undoubtedly being discussed as part of the fiscal cliff negotiations (or at least should be discussed).

This article, however, is atrocious. Whatever the merits of the author's proposal, his conclusion is not substantiated very well:

(1) In contrast to the quantitative academic studies cited, his argument for taxing 401k contributions as normal income is, literally reduced to: Imagine there were no 401(k)s. You wouldn't stop saving for retirement, right? Right. For a middle-income family, imposing a federal tax rate of 35% and additional state and local taxes means that the same savings would be worth about 1/3 to 1/2 less when they retire. This is a big deal. How many people would heavy up their savings for increased taxes? One can only guess, but it's probably not a whole lot.

(2) The author says that 401k tax breaks are 'wasted'. This comparison made only when comparing voluntary tax-free contributions to greater forced savings. I am all for better retirement planning, but Mr. O'Brien really, really needs to get out and experience how people who make less than the median income would be affected by the reduction in paychecks that would result from additional forced withdrawals from paychecks.

(3) The article invokes Suze Orman when she has absolutely nothing to do with this proposal. Furthermore, it leads with a large unflattering picture of her. Where it lacks an argument, it relies on a rhetorical question ("you wouldn't stop saving for retirement, right?") This is what propagandists do.

(4) The author assumes a misinformed reader. If this sounds familiar, it's because that's how the payroll tax works -- except it's how you think the payroll tax works now. There's a misconception that the money the government withholds from you every month ends up in an account with your name on it that eventually becomes your Social Security benefits. It doesn't. This is especially puzzling since readers of The Atlantic probably do not share this particular belief.

(5) The graphs are extraordinarily hard to interpret and lack some basic information in order to make sense of them, such as the "top tax cutoff" rate, the years involved, the exchange rate, average financial readiness for retirement in Denmark. They appear to be included not to shed light but to give the impression that the author's thesis has been confirmed by an academic study even if the reader cannot grasp the proof.

To get the context, it is necessary to pull up the original academic study (http://obs.rc.fas.harvard.edu/chetty/crowdout.pdf). Even that is not sufficient, and a number of other factors have to be researched independently. After poring over those charts and looking up some background material for an hour or so, all I can conclude is that when Denmark began offering tax breaks for retirement savings accounts, people above the "top tax cutoff" invested more in those accounts, a trend which was strongly correlated with income. (In other words, the wealthy invested more than those just above average.) Maybe this supports the author's proposal to eliminate 401k accounts in the US, but to put it kindly, it seems like a stretch.

Maybe taxing retirement savings is a good idea. But this article makes me more wary of it rather than less.

I Know People Say That, Meti57b,

but as far as I can tell, that argument shows a fundamental misunderstanding of what a bond is and should be completely disregarded.

Corporations or government entities issues bonds in order to borrow money. The money is always spent -- that's why bonds are issued. Regardless of the reason, the bond is an asset. It is generally safer than stocks or most investments. The Social Security fund has a surplus of over $2 trillion of these bonds.

Whatever Congress spends for defense, medicare, or any other purpose is irrelevant. The bonds are in the rough equivalent of a pension fund and earmarked for Social Security shortfalls that will occur as the baby boomers retire. Theoretically, the Social Security fund could trade them for corporate bonds or bonds of other government entities, but they buy Treasury bills in order to reduce risk. In hindsight, it's not too bad a trade.

Any Chief Financial Officer that invested the pension fund in company bonds and then tried to tell retirees or other bondholders "Oh, those bonds we issued? We spend that money on a factory" would be summarily laughed off the stage, fired, sued, and end up in jail. It's an utterly ludicrous argument to anyone with any knowledge of financial instruments. It appears to be designed to impart a sense of sophistication to those ingenuous enough to trust their sources, repeat that line to others, and build up a consensus for cutting Social Security.

If that happens, I really don't know what would happen to the bonds in the trust fund. They won't evaporate and can't be used for anything else. If there is an attempt to appropriate them, it would have to be voted on by Congress. In that case, the only justification i can think of would be: "But the pension fund was just sitting there!"

As far as "worthless promises to pay it back," the behavior of bondholders (primarily the very rich and pension fund managers) indicates that the "promise to pay it back" is held in higher regard than virtually any other government or corporate entity.
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