Friday, April 1, 2016
What prompted me to write this article is that I just finished reading a report titled "Not As Many Americans Saving For Retirement", where it was reported that during a survey of 15,000 people in their 40's, less than half of them had more than $10,000 investment in retirement accounts or saved in a conventional manner for retirement.
This is not good news, either for the continuation of Life As We Know it or for The End Of The World As We Know It (TEOTWAWKI). Some readers will think "why is Urban Survival Skills writing about retirement?...I want to read about guns, gear and surviving the collapse". I fully understand that, but I look at many different financial and investment resources in order to provide indicators of where the financial collapse might start,.....will it be a slow devaluation of the dollar and rise in prices of commodities?....will it be a food based collapse where the dollar value becomes inflated? Could it be a cash crunch if the Government nationalizes our 401K and other savings accounts?
People are investing fiat currency into on paper financial assets such as stocks, bonds, mutual funds, 401K plans, etc. This is a crap shoot as far as building wealth, makes it hard to divest yourself and re-coup cash on short order and does nothing to cover the possibility of a collapse where transfer or access to these paper assets will produce just pennies on the dollars of your investment at best, or just a memory of lost wealth at worst.
People really need to consider developing a good balance between tangible and intangible assets. I reduced my payroll contributions to my 401K to the minimum necessary to obtain the employer matching funds. I took the money freed up every two weeks and split that into precious metal purchases (primary silver bullion) and began working off a list of things I want to improve for my preps,....ammunition, bulk long term storage food, non-hybred seeds packs, on hand cash, some surplus military gear including a large box of two quart canteen and rain suits which I discovered on the cheap and purchased intended as barter items.
Anyway, lets look at the possibility of the Government ruining your conventional retirement plans. The article below is from Ryan Guina, titled "Can the US Government Seize Your 401k or IRA?"
Last year, the Irish government passed a law which placed a 0.6% levy on assets held in private pensions for each of the next 4 years. The Irish tax on private pensions was made in response to a larger financial crisis and the need to increase government revenues. Ireland isn’t the only country in recent history to seize private investments. Hungary, Argentina and France have all overhauled their private and public pension plans in recent years, in some cases seizing them in their entirety, and in others, taxing them to oblivion. There have been recent discussions of something similar in the United States, which brings up a good question – are private pensions and retirement plans in the US also at risk?
Is Your 401k or IRA in Danger of Government Seizure?
Can the government take your 401k? Will the government scramble your nest egg?
Lets get one thing out of the way first: unless you have an IRS lien or other legal judgment against you, the US Government has no legal standing to seize the contents of your private retirement account, such as your 401k, IRA, Thrift Savings Plan, your self-employed retirement plan, or any other retirement plan.
Can the government take your 401k? Absolutely. But not without changing the laws, and in this case, it would take an act of Congress for the US Government to be able to seize your retirement funds. That means it would need to get through Congress, the President, and the Supreme Court before it would happen. And getting past the Supreme Court is where I see there being big problems – keep in mind that ownership of private property was one of the founding principles of our country. It is very difficult for the government to seize private property at will. The government can, and does, seize private property, but only in rare cases and through a legal process called eminent domain, which is when land or other property is seized “for the greater good.” However, the government is required to pay fair market value for whatever they seize.
The above is a simplified explanation of eminent domain, which is a highly complex and much debated topic. I’m not a lawyer, but I don’t think eminent domain would be a legal basis for seizing retirement accounts. Taxation, however, is a different topic, and the government can easily change tax laws.
What about the rumors of a government takeover?
Every few years there are rumors that a particular administration wants to seize private retirement funds, and so far it hasn’t happened. The rumors come in different flavors and several ideas have even been proposed before Congress. For example, the Clinton Administration proposed a one time tax against the value of private pensions, 401k plans and IRAs.
A more recent proposal involves seizing and converting a portion of privately held assets into US Treasury bonds. A more extreme proposal is a true government takeover of retirement plans which involves seizing private retirement accounts and converting them to government sponsored annuities that would guarantee and annual income for all Americans.
What basis is given for a takeover of retirement plans?
There are many reasons given to support these ideas, and the most frequently given reasons circle around the idea that converting some or all of the privately held investments into an annuity or into Treasury bonds would protect Americans from themselves and possible market fluctuations and guarantee an income for retirees. In essence, the government believes it can do a better job of managing your retirement funds than you can.
The reality is these proposals would represent a redistribution of wealth and further extend the problem that got the government in trouble in the first place writing IOUs. Seizing pensions or retirement plans now and replacing them with a Government Treasury bonds or a government sponsored annuity simply gives the government money to spend now and passes the problem on to a future generation. It also goes against the reason private retirement plans were created.
The purpose of retirement plans-
Let’s back up and look at the purpose of 401k plans, IRAs, and other retirement plans. These retirement plans maintain a special tax status and were created for a specific reason: to entice more people to save on their own because Social Security benefits do not pay enough for most retirees.
Social Security is not intended to be a full retirement plan for everyone; it is intended to help people through retirement. Several decades ago Congress was smart enough to realize that people needed to take more of their retirement planning into their own hands, so they created the tax incentives we know today as the 401k plan, IRA, and similar retirement plans. The special tax rules found in these retirement plans provide an incentive for people to take care of their own retirement planning and not rely on the government for 100% of their retirement needs.
How retirement plans affect the government-
Retirement plans are good. They provide retirees with a source of income and in many cases help keep people off government benefits. For example, Medicaid eligibility is age and income based, starting at age 65. Social Security benefits are also taxable for retirees who meet a certain income threshold. So retirees receiving enough income from their retirement savings stay off Medicaid and pay taxes on their 401k withdrawals and Social Security benefits, both of which help the government.
While retirement plans help the government, they can also hurt it in other ways. In the case of retirement investing, what is good for investors can be bad of the US government. The tax benefits offered by retirement plans limit or defer the income tax the government collects, to the tune of billions of dollars per year.
For example, Traditional IRAs and 401k plans offer investors an immediate tax break on contributions and the proceeds are taxed when the money is withdrawn in retirement age – often deferring income tax for decades. Roth IRAs and 401ks are the opposite, with the contributions being made after taxes have been assessed, and the withdrawals and income growth being tax free. These tax benefits are the reason there are contribution limits on IRAs and other retirement plans. Without contribution limits, the government would severely limit their income tax receipts.
What will the government do with private retirement plans?
Will the US Government seize private retirement plans? The simple answer is, we don’t know. It’s very possible the government could pass a law that seizes every private pension and retirement plan in the US and replaces it with a government annuity to be paid out once retirees reach a certain age. It’s also possible they will do nothing and leave things as-is. My guess is the government won’t “seize” retirement plans like other governments have, but I wouldn’t be surprised to see things will change.
Let’s face it, our government is hurting. There are huge gaps in our fiscal policy and unless we see changes soon, something major will happen, possibly even the collapse of the dollar and our economy. But seizing private pensions wouldn’t solve that problem, and in fact, it could be seen a as sign of weakness by the global economy and hasten the fall of the US Dollar compared to other currencies. Additionally, seizing private retirement plans would be political suicide for politicians.
What changes might we see to retirement plans?
We can’t see into the future so all we can do is speculate. I don’t see the government seizing retirement funds from private individuals. However, I wouldn’t be surprised to see the government make changes to the number and scope of retirement plans. But this would probably be a gradual change and old plans would likely remain grandfathered in.
For example,the US government could decide to decrease retirement plan contribution limits, lower the income eligibility threshold, or eliminate some retirement plans altogether. But even if they do this, they would likely grandfather in current contributions, meaning your retirement plans in their current state would be safe.
What can we do to prepare for our retirement?
Right now I don’t think there is anything to be scared about. We can’t control the future, so the best course of action is to continue preparing the best we can based on the information we have at hand. This means to continue making investments based on current tax laws, while being mindful of possible changes. Personally, I am preparing for retirement by investing in my 401k and IRA, and I am also investing in taxable (non-retirement) investments when I can. It is wise to be aware of possible changes to tax laws, but I don’t think it’s wise to let fear and unsubstantiated rumors drive one’s investments and retirement planning. So I will continue investing responsibly, and I will keep an eye on the news.