Having been formerly more involved in the financial planning
business, I still keep an eye on the ramblings of various experts in the
industry. Most of them are talking about some common sense moves, considering
the prospect of a furthering dip in the economy; essentially keeping money in a
variety of safe instruments such as bonds, gold, CD's etc., and minimizing risk
exposure. The bulk of them are pretty hesitant about plunging back into growth
equities, or housing development, at least for the time being.
That's why I read with interest an article yesterday on
Bloomberg, and other articles, about 2 out of 3 three planners recommending
headlong plunging into equities- in particular, large and small cap growth
instruments. Not that it’s all that far off base (it could be a high
risk gamble that might just pay off big), it's just I suspect anything that
comes out of the media these days; not to mention it also represents a very
thin voice in the majority of cooler heads.
I did a little digging and pretty much came up with nothing
on the notion, other than the obvious- right now the bond market is pretty flat
due to the pouring in of large amounts of money into it. It's too complicated
to get into here, but generally when people buy a lot of bonds, the yield goes
down. When people buy stocks, the price goes up, and bond yield
prices go up- chiefly because companies have a tough time getting cash and
offer higher yields to attract bond buyers.
Thus, they are making the recommendation, because yields are
low right now.
But then I thought about the new financial regulations that
went into effect recently- one of which requires 401k trustees to disclose to
investors about an option offered at the time of retirement, which is called
annuitization. Sometimes, when you retire, annuitizing money is a good option
to provide a higher level of income than simple distributions,
depending on your particular situation. The new regulations call for 401k companies
to provide not only an annuitization option, but also to compare it with a
'government average yield index' (I'm not sure if that's the official term) and
providing an annuitization option funded with something called 'R' bonds, or
the R bond index.
Thus, when you retire, and
pull your money from, let’s say Bank of America, they may say to
you , "You can annuitize it and get $1200/mo. for the rest of your
life" and then you can compare it to the average R bond index, which might
be $1500/mo., to see if you are getting a good deal. It was done under the
guise of consumer protections- which the Bloomberg article goes into more
detail about.
On the surface that seems pretty innocuous- they don't want
people ripped off. Except, nobody in their right mind would annuitize the whole
401k, you typically only partially annuitize and hold some in reserve. A good
planner always provides numerous options from their portfolio, and you would
choose the plan that provided the highest payout for the lowest risk you were
comfortable with. The comparison is really redundant, and unnecessary.
So why is it there? And why would the media, mouthpiece of
the government, be suggesting a heavy move away from bonds?
Well, the government needs the bond yield to go up. This way
the average index number goes up a lot too, since annuitization schedules are
typically tied to bond yields.
So what, right?
Right now, the government is howling that Social Security is
in serious trouble. The President’s economic people have determined that unless
something is done, and soon, Social Security is going to run into serious
deficit problems. People are living longer, and less people are putting money
into the system. Among the changes proposed was the raising of the retirement
age etc., but also, they wanted to add something called 'means testing' to the
payout. The general feeling is that people like Warren Buffet, hardly need the
extra 2-3k a month SSN checks they get, thus the government could cut off
payouts to wealthy individuals and save a bundle. The only way to determine
that is something called 'means testing', where the government calculates your
estate at retirement, and then lowers your Social Security if you are making a
lot of money from your estate or income sources.
The big problem is that there was (before the new financial
regulations) no way to determine the monthly payout value of IRA's, 401k's and
other tax deferred plans, because they are typically invested in variable
instruments (like stocks and bonds) and the payout will fluctuate accordingly.
As a result, 'means testing' hit a brick wall.
Unless, of course, you annuitize.
Thus, by enforcing an index on every tax deferred instrument
in the marketplace, you have instantly assessed the retirement income value
of every American. The higher that index
is the more money you can deduct from Social Security payouts.
In short, by replacing your Social Security payout amounts
with your own money saved, the government just stole potentially trillions of
dollars from Americans savings in order to pay its own debts.
Uncle Sam just seized
everyone's 401k, at least to some degree.
More importantly, it is communism defined. To take from the
wealthy, in order to give to the poor, or worse, the government, is the very
tenet of communism. To do this would gut the entire point and value of
retirement savings, and the concept of tax deferral. And since the 401k and
traditional IRA's are considered taxable income, you would get whacked again at
retirement. Money was taken out of your paycheck to pay Social Security, and
now the money is reduced as a tax deferred replacement. Even if Social Security
is considered taxable income, taxes aren't directly deducted from it- they
would be, however, if it were replaced with your 401k money.
Authors Dean Baker and Mark Weisbrot, who are financial
gurus on the market and Social Security, put it bluntly:
"It is not just
the absolute numbers that are significant but the nature of the program as
well. Social Security is a social insurance program in which retirement
benefits are proportional to one’s payments into the system.
Means-testing would convert the system into a welfare program. And we
know from the recent cancelation of the most important federal welfare
entitlement, AFDC, how much more difficult it is to defend welfare against
political attacks than it is to defend social insurance."- Social Security: The Phony Crisis
Both sides of government want to do this, mainly because they
are not telling the American people that we are broke and the Social Security
trust fund represents the largest lump sum of cash lying around today, not only
in the United States, but quite possibly worldwide. Such a means testing
system, would remove generations of protections built into the system, and
allow government to tap consumer’s wallets with virtually unlimited power,
without raising the possibility of Americans howling about new taxes. You
wouldn't see the freight train on this until it was right on top of you at
retirement.
All they would have to do, is recommend you sell bonds (or
even buy them up with your tax dollars) to artificially raise the R bond index
level. Even a small change to the index, if linked to means testing Social
Security, would flood the tax coffers with new revenues.
That's the thing about government and regulation, and why
new regulation is almost always a bad idea.
You just can't trust those guys.