From Bloomberg: "Argentines Decry State's `Disastrous' Record as Pensions Seized." Excerpt:
Fourteen years ago, Raul Zimmermann opted to contribute to one of Argentina's new private pension funds because he didn't trust in the state retirement system. Now he's outraged by government plans to seize his savings and take responsibility for paying his monthly benefit.``The history of the pensions managed by the state is disastrous,'' said Zimmermann, 69, who started drawing a pension two years ago. ``It's not reasonable that they transfer my account without even asking me if I want to.''
On Oct. 21, President Cristina Fernandez de Kirchner announced plans to take over $29 billion of private pension accounts, saying a state-run system would protect retirees from fluctuations in financial markets. Roque Fernandez, an economy minister and central bank president in the 1990s, said the move is a ``confiscation'' of people's savings. . .
More links:
Also, see this OpEd from Investors Business Daily: "Argentina Spreads the Wealth." Excerpt:
U.S. Democrats in Congress are mulling like-minded moves to scrap 401(k)s and transfer them into government-managed "guaranteed retirement accounts" with a 3% return, according to James Pethokoukis of U.S. News & World Report (full disclosure: Pethokoukis is a former IBD reporter).Before they charge ahead, they should look at what happened since Argentina's announcement: Its stock market lost 23% of its value in two days, for a 57% loss since January. The losses spread to other markets in Brazil, South Africa and Spain.
Markets don't like expropriation of private property — including savings. And this takes away a key source of private capital. Moreover, one quarter of private pension assets were by law invested in Argentine stocks, making up about a quarter of the bourse's value. So the seizure of pensions amounts to government ownership across the entire private sector.
"It's a stealth nationalization of every single business in the country," explained Diana Mondino, an Argentinian economist at Universidad del CEMA in Buenos Aires. "Will (the government) influence those companies? I would think so — anyone who owns 25% of a company will have a lot to say about how it's run."
Growth will suffer, and Moody's already warns it "undermines the government's already weak policy credibility."
Previous post here.
Yesterday, in San Francisco, there was a second hearing of the House Education and Labor Committee entitled "The Impact of the Financial Crisis on Workers' Retirement Security." You can access the testimony here. As there was in the first hearing (discussed in a previous post here), there was testimony advocating a government take-over of the 401(k) system as well as a promise from Chairman Miller that the "Democratic Congress will continue to conduct this much-needed oversight on behalf of the American people."
A more rational approach was advocated by Tif Joyce:
First, after they calm down, people view the recent financial turmoil as the latest in an ongoing string of challenges that must be overcome. We need to fix our problems because we have no choice.At times like this, both investors and government alike need to be concerned about overreaction and trying to create permanent solutions for temporary problems.
If you ask most voters what they think of “a new national defined benefit plan” I strongly believe they would say, “Please fix Social Security first.”
On October 7th, a witness testified before this committee stating that our nation’s pain and chronic financial anxiety is caused by the corrosive effects of 401k plans…
People understand that life is not always fair and they don’t expect government to legislate certainty. Let’s also keep in mind that huge numbers of people have successfully used retirement plans exactly as they were intended to be used.
Apparently, Argentina's President Cristina Kirchner has signed a proposal nationalizing the country's private pension funds. The Wall Street Journal reports here that this is being seen as a "grab for cash and power amid the global economic crisis." Excerpt:
Argentine stocks fell by more than 11% in reaction to news that the government plans to nationalize private pension funds.Details of the proposal -- which must be approved by the country's legislature -- were not immediately available. It was signed by Ms. Kirchner, along with Labor Minister Carlos Tomada and Amando Boudou, the head of the national social security system, ANSES. But an announcer during the televised signing ceremony described it as a project to "eliminate" the "capitalization system," a reference to the defined-contribution plans run by 10 private funds known as AFJPs.
In a speech following the signing ceremony, Mr. Boudou said the reform would "rescue Argentine retirees from uncertainty."
This Bloomberg article here indicates:
About 55 percent of the 94.4 billion pesos held by the country's 10 private pension fund managers are in government debt, according to the pension regulator's Web site. Nationalization would allow the Fernandez administration to write off the government bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors.
More from this BBC article here:
Amado Boudou, head of the National Social Security Administration, which will take over the funds, said the "failed experiment" of private pensions was finished.But the pension administrators defended the system, saying it had a "solid mechanism" that had seen an "almost constant growth trend in the 14 years of its existence".
Union leaders have welcomed the nationalisation move. The commissions on the pensions and the lack of a guaranteed minimum pension has made the private system unpopular with many Argentines.
All of this sounds a bit reminiscent of some of the comments being made about our country's retirement system and the push to have a universal pension as discussed here and here, a proposal which I wholeheartedly reject.
Some language from a proposal being advocated (the parallels seem obvious to me):
Short term, I propose that since 401(k) accounts and the like are financial institutions -- the bank about where 38% of the workforce can intend to save for their retirement -- Congress let workers trade their 401(k) and 401(k) - type plan assets (perhaps valued at mid-August prices) for a Guaranteed Retirement Account composed of government bonds (earning a 3% return, adjusted for inflation). When the worker collects Social Security, the Guaranteed Retirement Account will pay an inflation adjusted annuity, based on the accumulated funds.How would this work? Take a 55 year old who had $50,000 in his 401(k) account in August and faces job loss and eroded assets because of the erosion of his retirement accounts. Let him swap out the $50,000 for a guarantee of $500 per month. The economy is probably in a recession, but a guaranteed income from his former 401(k) removes a source of financial anxiety, and -- this is not trivial – it end fruitless discussions with brokers and financial sales agents, who are also desperate for more fees and are often wrong about markets. . .
The sooner we admit that our 30 year experiment with 401(k) accounts has failed the sooner we can use these precious government subsidies efficiently and equitably.
From Workforce Management: House Democrats Contemplate Abolishing 401(k) Tax Breaks. Excerpt:
Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute. . .
More:
This is a battle between liberalism and conservatism,” said Christopher Van Slyke, a partner in the La Jolla, California, advisory firm Trovena, which manages $400 million. “People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny,” he said.The Profit Sharing/401(k) Council of America in Chicago, which represents employers that sponsor defined-contribution plans, is “staunchly committed to keeping the employee benefit system in America voluntary,” said Ed Ferrigno, vice president in the Washington office.
“Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system,” he said.
No legislative proposals have been introduced and Congress is out of session until next year.
See also this article from the Wall Street Journal for what might be in store: A Liberal Supermajority: Get ready for 'change' we haven't seen since 1965, or 1933. Excerpt:
If the current polls hold, Barack Obama will win the White House on November 4 and Democrats will consolidate their Congressional majorities, probably with a filibuster-proof Senate or very close to it. Without the ability to filibuster, the Senate would become like the House, able to pass whatever the majority wants.
Access a previous post here which discusses the universal pension movement.
At the recent Hearing before the U.S. House Committee on Education and Labor, entitled "The Impact of the Financial Crisis on Workers' Retirement Security," there was a lot of discussion about the dire state of the retirement security of Americans. And from that hearing came the remark that American workers have lost as much as $2 trillion in retirement savings over the last year and that the system is broken. You can access the testimony here (as well as the recommended fixes). While it is true that we need to be examining a number of areas involved here, I don't agree with those who are advocating that we need a universal pension system. I would say that there are ways to improve the current system and for starters would recommend the following:
(1) Congress should get rid of the oppressive excise tax (50%) imposed on surplus assets distributed to employers from overfunded defined benefit plans. This tax which was enacted in the 80's was the beginning of the decline of the defined benefit plan (IMHO). One of the reasons this tax is so unfair is that there is no way employers can adequately predict exactly how much money should go in to a defined benefit plan, i.e. actuaries can only make an educated guess at what the market is going to do and the mortality rates are going to be. Therefore, in the 80's there were a lot of plans that were overfunded. This enabled plans to ride out the down times in the market. However, now with this excise penalty tax in place, employers have been much more cautious about how much they put into these plans and therefore, when the plan hits rough times, many employers are forced to terminate or freeze them. Many such employers will then adopt a 401(k) plan in its place which unfortunately doesn't always compare with the rich benefits people have or used to have under the defined benefit plan system. Thus, Congress should repeal the Section 4980 excise tax so as to encourage employers to maintain defined benefit plans and perhaps encourage employers who have abandoned these plans to reinstate them.
(2) Congress should get rid of the 10% penalty tax on early distributions. It is enough of a disincentive for people to have to pay income tax on a distribution. They do not need an additional tax like the early distribution penalty to encourage them to keep their money in a retirement plan socked away for retirement. In fact, I would argue that this tax actually discourages people from saving. Whether or not Congress does something on a permanent basis, they need to at least get rid of this tax on a temporary basis for people affected by this economic crisis.
(3) Congress should get rid of the minimum distribution requirements. Older Americans are lulled into thinking that because they are taking a distribution and paying tax on it, they can then spend it and do not have to save it. So, when the stock market declines, they do not have enough money in their retirement plan to make up the difference. It also forces older Americans to have to liquidate their assets to pay a distribution.
Also, dittos on all of the efforts to reduce fees and make them more transparent. See also these comments from Jerry Bramlett who testified at the Hearing:
. . . I do not believe the 401(k) system is doing an adequate job of educating participants as to how they need to invest their account as they get closer to retirement. The practical impact of a substantial market decline on a 64-year old worker months away from retirement can be very different than the impact on a 50-year old 15 years from retirement. If the retirement account of the 64-year old is heavily invested in equities, the impact of a major market decline on retirement income expectations can be devastating. However, if that same account had been properly diversified with a greater emphasis on fixed income securities, the impact of a major market decline may very well be manageable. Although the advent of target-date investment funds based on a participant’s age has greatly helped in this regard we need to do more. I would recommend that Congress instruct the Department of Labor to develop educational materials specifically for 401(k) participants that have reached age 50 to assist them in better managing their account in preparation for retirement.
UPDATE: Apparently, McCain is advocating the repeal of the minimum distribution requirements as well. Read about it here- "McCain Calls for Suspending Rule on Retirement Accounts." The article notes that "[s]uspending that part of the tax code would benefit “high pension or high-net-worth individuals.” However, I have seen my 84-year-old widowed mother negatively impacted by these requirements and she is nowhere near being a "high-net-worth individual."