Are US Retirement Accounts at Risk?
With disturbing trends taking place here and abroad, Michael Ross asks, "Are tax-exempt savings in IRA and 401(k) plans a tempting target for a bankrupt government?"...
Retirees, investors, business owners, and countless others are becoming increasingly concerned by the growing debts of governments worldwide. As Japan slips into its third decade of an ever-deepening recession, observers also point to the United States, whose national government indebtedness is now the largest of any in human history. Consider these facts:
- In 2001, the US federal debt was less than $6 trillion. By the end of the 2012 fiscal year (September 30), it had topped $16 trillion [source: Treasury Department].
- It increased more during President Obama's first three years and two months in office than it did during the eight years of his predecessor's two terms [CBS News]. By the end of Obama's first term, the debt had increased by $5.8 trillion, which is greater than the total debt accumulated under all the presidents from George Washington through Bill Clinton [CNS News].
- The US government is responsible for more than a third of all the government debt in the world, which itself is now well past $40 trillion [Huffington Post].
- The ratio of US federal debt to the country's entire GDP is almost 75 percent, and the country's external debt relative to its GDP has reached 103 percent [Trading Economics], making it the second worst major country, and putting it in the fiscally disreputable company of Ireland and Portugal.
- The US government debt is increasing by about $150 million every single hour. It now exceeds $52,000 per citizen, and is almost $146,000 per taxpayer [US National Debt Clock].
- The first trillion of debt took two centuries to accumulate, while the most recent trillion was racked up in only 286 days [Sovereign Man].
- This is the official debt, and thus merely the tip of the iceberg of unfunded obligations of Social Security and Medicare, estimated at an astounding $222 trillion, by economics professor Laurence J. Kotlikoff [Real Clear Policy].
With Keynesian economists claiming that indebtedness is not only benign but economically beneficial, and American politicians asking every voter to trust that they will somehow balance the books in the future, we should ask ourselves how this is going to end. If history is any guide — and it invariably is — then it all may end quite badly. Every major political power in the past — even the mighty Roman Empire — could not sustain these levels of indebtedness forever. In the meantime, it is a worsening drag upon the American economy. Economists Carmen M. Reinhart and Kenneth Rogoff (authors of This Time Is Different: Eight Centuries of Financial Folly) have shown that government debt exceeding 90% correlates with a decline in economic growth of approximately one percentage point each year. More disturbing is Professor Reinhart's observation that hitting the debt wall is typically an unexpected and nonlinear event [Wall Street Journal]. (Anyone who wishes to learn more about the US national debt can view the documentary "I.O.U.S.A." or a condensed version.)
There is ongoing debate as to how long the United States can continue to sustain these growing levels of federal debt. Based upon analysis conducted by The Comeback America Initiative, a deficit watchdog group, the Sovereign Fiscal Responsibility Index [Wall Street Journal] indicates that the US government is on target to default within 16 years.
Saviors at the Ready?
Will foreigners, including the central banks of China and Japan, continue purchasing US debt (primarily for maintaining currency stability with the US dollar for mercantilist purposes)? That trend appears to be ending, as those banks have started the process of slowly but surely reducing their exposure to US Treasury securities [Business Insider]. In fact, the Federal Reserve is now compelled to purchase 90 percent of all new Treasury bonds, a.k.a. "monetizing the debt " [Bloomberg].
Will American state governments be able to bail out the feds? That is unlikely, since most of them are deep in hock as well. The profligacy of the California state government is well-known, but more fiscally conservative states are similarly increasing their debt and tax burdens. For instance, in Texas, since 1993, local sales taxes and property taxes have increased by 170 percent and 188 percent, respectively [Mish's Global Economic Trend Analysis], but none of that has prevented the combined state and local debt in 2011 from reaching $233.2 billion, which is $8,950 for every one of the 26 million Texans.
Will the federal politicians be able to rein in spending? Social Security consumes 20 percent of the budget [NBC News], and is already running large deficits that are projected to increase dramatically [The Heritage Foundation]. Those costs will be exceeded by those of Medicare in the decades ahead [The Heritage Foundation]. Combining all forms of entitlement spending, the total will nearly double by 2050, after 78 million baby boomers have retired and their health-care costs have skyrocketed [The Heritage Foundation].
Could we see sizable cuts in the national military budget? Probably not. It too accounts for 20 percent of the federal budget. The United States spends more than the rest of the world combined on its military, and has over 660 bases in over 38 countries [PolitiFact], with more than a quarter million troops stationed overseas [Global Research]. Ever since the attacks of 9/11, new bases have been added in seven countries. Military spending consumes more than nine percent of the country's GDP, and that is increasing [Zero Hedge], as we now deploy additional troops into African nations.
Overall, total federal spending is increasing rapidly. In 2012, it broke through the level of $30,000 per household, and is expected to exceed $34,600 by 2022 [The Heritage Foundation]. In fact, it is growing 12 times faster than the US median income [The Heritage Foundation]. Even halfhearted attempts to reduce future spending — such as the "Super Committee" — have failed [Casey Research]. The trends are undeniably clear and worrying in the series of charts referenced above [Business Insider].
Will tax increases solve these fiscal problems? According to data from the Internal Revenue Service, in 2009 (the latest year for which data has been provided), the top one percent of earners paid more than 36 percent of all federal tax revenues collected, the top five percent paid more than 58 percent, and the top 10 percent paid more than 70 percent of income taxes [National Taxpayers Union]. What are the odds that the feds will be able to successfully squeeze even more money out of the business owners and others who create and manage the wealth? At the other end of the spectrum, roughly half of all Americans paid no income tax [The Heritage Foundation], and that is unlikely to change given the current political environment. We now have only 115 million Americans paying income taxes, but 120 million receiving government entitlements, and it is growing at a rate of more than six percent every year [Richard Russell].
Nonacademic Americans are often criticized for not understanding basic macroeconomics. But at a personal level, they cannot help but feel the impact of government spending on their own financial well-being. They may not know the exact numbers or the prevailing forces at play, but they must have a sense of it all, as they struggle to make ends meet, despite working longer hours. In 2012, working Americans lost 197 days of earnings as a result of all government costs, and the trend is worsening every decade [Cost of Government Center]. In effect, 54 percent of US workers' income is consumed by government.
Americans of all income levels will naturally adjust their behavior to try to minimize the negative impact of increasing taxes and fees, and this often includes deferring income taxes by contributing a portion of their paychecks and self-employment revenues to tax-deferred accounts, such as 401(k)s and IRAs. Government officials, mainstream financial planners, tax attorneys, and financial commentators constantly urge Americans to maximize these contributions. But are those funds safe?
A growing number of European nations have seized private and public old-age funds that retirees assumed were off-limits to confiscation. In March 2009, the government of Ireland took 4 billion euros out of their National Pensions Reserve Fund (NPRF) in order to prop up their insolvent banks during the financial crisis. In March of the following year, government officials stole the remaining 2.5 billion euros to bail out the rest of the country [Christian Science Monitor]. In May of 2011, the government began raiding the private pensions, with a special tax [Business Insider].
In November 2010, the French parliament decided to pay off debts in their massive welfare system — specifically, the social debt sinking fund Cades — using the 36 billion euros in the Fonds de Réserve pour les Retraites (FRR), their reserve pension fund [Financial News].
Also during that November, the government of Hungary decided to reverse the pension reform it wisely initiated in 1997, by forcing the private pension funds back into the national pay-as-you-go system, effectively taking 2.7 trillion forints ($13.5 billion) owned by 3 million people who had counted upon that money being available when they retired [Wall Street Journal]. Less than two years later, the Hungarian Cabinet had spent about 1.5 trillion forint of the assets buying back government debt. The remaining assets declined in value to 591 billion forint ($2.6 billion), another reminder of governments' abilities to manage assets [Bloomberg].
The Bulgarian government tried to pull off something similar, when they attempted to transfer $300 million of private early retirement savings into the state pension system, but snagged only 20 percent of the money because of protests by trade unions [Christian Science Monitor].
That Christian Science Monitor article points out that the United Kingdom appears to be moving in a similar direction, in the form of a minimum pension for up to 11 million workers, with automatic enrollment.
That same source also notes that the government of Poland nationalized one third of future contributions to individual retirement accounts, moving the funds over to the national social security system. That government scheme has no assets; consequently, the money will disappear into the state treasury, and savers will lose about $2.3 billion per year. Earlier, the government tapped their Retirement Reserve Account for current funding in 2010 [Zero Hedge]. Another article indicates that the confiscated amounts were much higher, at 5.6 billion euros [Zero Hedge].
In southern Europe, the insolvent government of Greece decided to freeze pensions, cut public bonuses, and raise several taxes, to comply with demands from the EU as part of their bailout deal [RFI].
Many of these government officials may have gotten the idea from Argentina, which in 2008 nationalized $30 billion in private pension funds [New York Times]. Other sources suggest that the value of the assets had dropped to $24 billion, by the time President Cristina Fernandez de Kirchner euphemistically termed the takeover as a "recovery of the administration of the workers' resources" [Bloomberg].
In several African nations, such as Uganda, instances of government officials raiding public pension funds, are so numerous as to be almost expected from each administration that takes what it can while in office.
Pension funds can even disappear as a result of the actions of other countries. For instance, the Palestinian Authority lost two-thirds of its entire revenues when Israel froze the money in bank accounts [IMEMC News].
United Seizings of America?
As early as August 2010, some American retirees learned of disturbing proposals in Washington DC that many sources characterize as eventual confiscation of private retirement assets. This would be accomplished by forcing Americans to invest their tax-deferred monies in government bonds, which is effectively confiscation through monetary inflation, as the real value of those funds are depreciated through currency debasement. Specifically, the US Departments of Labor and the Treasury held joint hearings, during which was discussed government plans to eventually take control of all assets in IRAs and 401K accounts and replace them with US government “Treasury Retirement Bonds”, whose 3% rate of return would be less than the actual increases in the cost of living [Coin Update].
That article also notes that, at the end of 2008, there were an estimated $3.613 trillion of assets in IRAs and $2.350 trillion of assets in 401K plans. Those tax-deferred accounts represent a juicy target for a bankrupt federal government, and arguably could have their rules changed at any time, since the monies have not yet been taxed. Economist Teresa Ghilarducci is one of many who testified in Washington DC and called for a federal government takeover of private retirement plans, in a plan so radical that even a mainstream media source termed her the most dangerous woman in America [U.S. News & World Report].
Could something like that happen in the "land of the free"? In a sense, it is already beginning. The US government started with a more compliant target, namely, their own federal workers. In May of 2011, Treasury Secretary Timothy F. Geithner, in response to the federal debt approaching the debt ceiling, began borrowing from the retirement funds of federal employees [Washington Post]. in January of the next year, this act of desperation was repeated [Reuters]. Even the U.S. Consumer Financial Protection Bureau is thinking of "helping" Americans manage their $19.4 trillion in retirement savings [Bloomberg]. The feds appear to be implementing this step-by-step, to see at what point Americans start pushing back.
The government is already contemplating another mandatory retirement system, called the "Automatic IRA", which would force businesses that do not have retirement plans, to fund accounts that would be forced into investing in Treasury bonds — thereby taking even more money from an estimated 40 percent of American workers and "investing" it into US debt [Money and Markets].
Simon Black commented, "The US government is $16.4 trillion in debt, and will be running $1+ trillion deficits for five years in a row. And the pool of retirement savings is irresistible. [...] they'll launch new regulations funneling a substantial portion of US retirement savings to 'the safety and security of government bonds'" [Sovereign Man].
How much longer until the top-level federal employees decide that it would be better to raid the much larger retirement funds of non-federal workers? Why should Americans presume that our government will behave any differently than those of other fiscally desperate countries? When, not if, US bondholders decide they have had enough IOUs and other empty promises, the feds may find our retirement savings to be too tempting a target.
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