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Q: I have heard that President Obama wants to take over 401(k) assets to reduce the federal deficit. My 401(k) is the single biggest asset I own other than my house. Do you know what the proposal is and how far along it is?
A: Not having heard this one, I did a little Internet research, and what I found was fascinating, and I also think instructive for where we are in today’s political environment, as well as in our chances for meaningful reform of our tax system.
Based on the (surprisingly angry) articles I found on the Internet, I suspect that my response may leave some readers miffed, as it will not fit their world view. But it is that anger that makes one pessimistic about achieving any tax-system reform.
In my doctoral studies I was taught that policy researchers do not advocate for a particular policy, as that is the job of policy makers, but instead lay out options and explain what the consequences of adopting various policies would be.
For example, a policy analyst could use research results to explain the economic effects of a cut in the capital-gains tax rate, or of adoption of a particular targeted tax credit. Policy makers would then need to decide whether the capital-gains tax cut or the credit should be adopted.
In 1984 President Ronald Reagan asked the Treasury Department to study alternative tax-reform structures. The result included analysis of reducing charitable contribution deductions, eliminating many tax deductions, and lowering tax rates.
Last November, CBO published an analysis of how the tax laws impact the decision to buy or rent a house, and included the possibility of taxing the rental value of an owner-occupied home, which has always been included as part of the economic definition of income.
Policy researchers are not lawmakers; they provided facts as to what might be done, and the politicians overlay their value system and political instincts. No policy maker suggests taxing the rental value of a home.
This is how the process should work. Policy makers need the expert input of policy researchers and analysts, but the decisions are made by the elected representatives of the people.
People who participated in the Reagan 1986 tax reform bemoan the lack of independent policy analysis today. Politicians seem to want staff members to give them information that supports the idea they have already adopted. Truly independent policy researchers and analysts are unwanted.
In October 2008 the stock market was falling and workers’ 401(k) assets were worth less than before. Congress had a hearing to explore alternatives to retirement savings for workers.
Teresa Ghilarducci of the New School testified about some policy work that she was doing. She was not the only witness. She has an idea called a “Guaranteed Retirement Account” (GRA), which would require a contribution from workers and employers, with a tax-credit offset available for low-income workers.
Accounts will grow at a federally guaranteed 3 percent return. Her suggestion is an alternative to 401(k) plans, which most economic researchers agree have not worked well as part of a three-leg retirement plan.
The Ghilarducci plan would allow workers to continue their current retirement plan if it offers benefits similar to the GRA, and perhaps also allow the worker to trade the 401(k) for a GRA.
The Ghilarducci plan, in the 4 1/2 years since her testimony, has never been part of any actual legislative proposal. The stock market is significantly higher than in October 2008, leaving less interest in even considering a government alternative to 401(k) plans.
It is not only important but essential that tax and retirement policy proposals be supported by independent research and analysis. That independent work is simply input to legislators and their staff. It can be rejected or accepted. It is good to listen to ideas, even if you choose not to implement the idea.
No legislative plan exists to steal 401(k) assets — that isn’t even the Ghilarducci proposal. I was disheartened to see the magnitude of uninformed Internet articles, expressing views that may lead our representatives to avoid exposure to any ideas, for fear of being linked to every proposal they just listen to.
James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.
