Wednesday, January 13, 2010

Could The Government Take Away Individual Control of 401(k) Savings?

A government proposal would take away some control of 401(k) by requiring retirees to convert some of their savings to annuities although 70% of US households oppose it. Whether this controversial plan would give retirees the hoped for security is however doubtful. See the following post from Expected Returns.

Our government is in the middle of a funding crisis that will be resolved as it always has: through the confiscation of citizens' hard-earned wealth. Judging by the way Americans are being conditioned to accept criminal behavior at the highest levels of government, this confiscation will probably be pretty explicit. I'm guessing we'll eventually see a FDR-style confiscation of gold and retirement accounts (401(k)'s). From the following article in Businessweek, Americans Oppose Initiatives Limiting 401(k) Choices, ICI Says, it seems that day is quickly approaching.

U.S. investors oppose federal initiatives that would force them to give up control over their 401(k) accounts, the Investment Company Institute said.

Seven in 10 U.S. households object to the idea of the government requiring retirees to convert part of their savings into annuities guaranteeing a steady payment for life, according to an institute-funded report today.

7 out of 10 Americans against government control of 401(k)'s? This probably means legislation is going to be shoved down our throats anyway. I mean, isn't this the new trend in our new "government-knows-best" style of government?

Annuity Conversion, aka Theft

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

The coming theft of retirement accounts is one of the most obvious trends for the next 20 years. I mean seriously, the American public stood shell-shocked like 5 year olds while getting looted to the tune of trillions of dollars- what makes you think the government isn't going to steal your retirement accounts?

The government is going to try to sell the move into annuities as a "safe" way to protect the public from the vagaries of the stock market. The truth is, the government is damn broke, which means they will have their hand in every person's pocket. The confiscation will function like this. American citizens will be forced to buy a worthless asset (in this case U.S. Treasuries) and receive a paltry return on capital. Factoring in inflation, returns are likely to be negative.

That the government has to resort to such measures indicates the severity of the current funding crisis. First, the insane monetization of debt. Now, Americans will be compelled to prop up the Treasury market. 5 years ago you couldn't make this stuff up; today, it is a reality.

Stock Market Collapse + Retirement Hopes Destroyed

Ok. So the government is basically telling us they are going to confiscate 401(k)'s. Now think for a second what happens when massive forced inflows of capital into stocks turn into massive forced outflows. It doesn't take a genius to figure out stocks are going to crater, and with it, the retirement hopes of millions of Americans.

When a critical mass of the population realizes this, then you will really know what a panic is.

401(k)’s were always structurally deficient products. The standard line is that with tax benefits and company matches, nothing can possibly go wrong! 401(k)'s are for the "wise" investor who is in it for the mythical "long-term". Whenever I hear this ridiculous line from someone, I know the person hasn't looked at a single "long-term" chart in his life. Sorry to ruin the party, but in the "long-term" (at least for Baby Boomers) stocks are going to go down in real terms and taxes are going to rise. And oh yea, you're getting taxed on earned income, which means if your 401(k) is actually worth something, the only person who will be celebrating is Uncle Sam. This is a disaster in the making for the disappearing middle class in America.

2010-2020: Major Paradigm Shifts Coming

These are interesting times. I can tell you this much: a lot of paradigms are about to change in the next 10 years. Most people are already skeptical of our government, which is clearly evidenced by the plunging approval ratings of both Congress and President Obama. However, most people are ignorant about the lengths governments always go to in order to prevent insolvency.

The current forced bond purchase scheme by our government reminds me a lot of what happened in France during the French Revolution, when church property was confiscated in return for assignats- which functioned as bonds. It didn't take long for those assignats to be worthless in value. I expect the same thing to happen eventually with U.S. Treasuries.

There will be a crisis of sorts in the near future. This is just one of the many reasons I am extremely bullish on gold.

This post was republished from Moses Kim's blog, Expected Returns.

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