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Killing 401(k)’s?

It’s still more than two months before the Obama administration takes office, and we are already seeing signs of just how the Democrats intend to govern.

One proposal being floated by Congressional Democrats aims to abolish the tax incentives for individual 401(k) retirement plans. With the recent financial meltdown having hit a lot of people’s funds heavily, those lawmakers think that the time would be ripe to end the private system and fold it into an expansion of Social Security.

The current plan, crafted by Professor Teresa Ghilarducci of the New School of Social Research in New York City, would eliminate tax breaks for these retirement plans. This would be coupled to an increase in Social Security taxes to fund an expanded retirement plan for workers.

The appeal of this plan is very, very shallow. Yes, the financial meltdown has seriously wounded many retirement funds. But over the long term, the stock market is always a good investment. Further, the financial markets are already in serious trouble. If the government eliminates the tax breaks for 401(k) plans and increases the Social Security tax, then the net result will be the diversion of literally billions of dollars out of the financial market and straight into the government’s coffers. That would be another critical blow to the already-shaky financial infrastructure of our nation.

At the same time, the heads of the big three automakers and their unions have been holding meetings with Congressional leadership about a possible bailout for their industry. The auto makers are in critical condition, and are looking for a cash infusion (like the one the financial market got) to keep them from going under.

The problem there is that a simple pile of money (no matter how tall that pile might be) won’t help the automakers fix their real problems. They are being crushed by commitments they made in healthier times–commitments to their retirees, to their workers, and their dealers especially. More money will only buy them time–not address their real problems. To fix those, they need to restructure their contracts with those three groups–and that kind of freedom most readily comes through the bankruptcy courts.

In both cases, the crises are being addressed not with actual solutions, but quick fixes that are aimed more at making people feel better than resolving the fundamental problems. And in both cases, the solution shares a common theme: The government is the only one who can help.

On the 401(k) issue, the message is “You can’t trust yourself and private industry to take care of you when you retire. You need the government to take care of everything.” And if, in the process, the government should suddenly find itself flush with cash (your cash)–all the better! After all, it will be far more likely to spend that money responsibly than you or your agents will.

Spend it, say, in keeping the auto indsutry going a little bit longer. Long enough to keep high-paying union jobs (and consequent union campaign donations and other assistance) going a bit longer, too.

Ronald Reagan said, on numerous occasions, that “the nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’” Those words now to be appear to be heading towards official policy.


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