A Bear Market for Liberty?

As I was reminded by a random commenter on a recent blog post, there is no shortage of people in this country with irrational and absurd notions as to how our society and its economy "ought" to be structured. And as a rule of thumb, I try not to pay them much heed. One of the greatest things about this great country of ours is that everybody has the constitutional right to say whatever they please, without fear of legal retribution. But the unspoken corollary to that freedom is that no one is obligated to listen, thank God.

However, when influential people with irrational and absurd notions of how our economy "ought" to be structured have certain powerful congressmen nodding in agreement, I tend to sit up and take note. And such is the case right now. Lost in all the sound and fury over the looming election and the plunging economy is a proposal -- currently winning some powerful converts on Capitol Hill -- that would fundamentally alter the way most Americans save and invest for their retirement years.

Economist Teresa Ghilarducci of the New School for Social Research has lately been promoting a plan to scrap the current system of allowing workers to shelter a portion of their income from taxes by investing it in a 401(k) or company-sponsored pension plan, and replace it with a government-run system in which all workers must participate by contributing at least 5 percent of their paycheck. In return, they'd receive an annual tax credit of $600, and a "guaranteed" return on their retirement savings of 3 percent, adjusted for inflation. Are we having fun yet?

The rationale for this not-so-subtle abrogation of personal freedom and choice is multifaceted, and deserving of at least a little consideration. First and foremost, such a plan would end the "subsidy" that 401(k) and pension plan contributions receive by virtue of their tax-exempt status. Ms. Ghilarducci -- who apparently cannot sleep at night knowing that somewhere, someone is not paying taxes on some of their income -- claims that this tax exemption costs the federal government $80 billion in lost revenue each year. (Just for context, this figure represents about 2.5 percent of the current federal budget.)

But more important than the added tax revenue, the Ghilarducci plan would "guarantee" an after-inflation return of 3 percent on workers' accounts, to guard against plummets in the stock market, such as the current one that's got so many workers nervous about their pensions and 401(k)'s these days. In a comment that deserves serious consideration for "Most Fatuous Statement of the Century," Ghilarducci notes that, "These last three weeks people are learning their 401(k) plans can go down." Who knew!

So, rather than allowing workers to choose whether and to what degree to participate in a company-sponsored retirement plan, and in the case of 401(k)'s, to choose what type and risk-level of assets to invest in, Teresa Ghilarducci would like to make that choice for you. Or rather, she'd like to abolish choice and turn your retirement fate over to the Social Security Administration. To make good on that guaranteed 3 percent return her plan promises, the government would invest workers' money in the only asset that can plausibly guarantee any level of return: government bonds!

So what sets this particular know-it-all economist apart from all the other self-proclaimed geniuses who would like to be running our lives? Well, in this case, a federal audience. George Miller of California and Jim McDermott of Washington, both Democrats in the House of Representatives, invited Ms. Ghilarducci to pitch her plan to their respective committees, and apparently they both like what they heard. McDermott's press secretary said the idea "Certainly is intriguing." No legislation is pending, but with both houses of Congress and the presidency all but certain to be in Democratic hands this January, there's really no need to rush.

And just think of it! Hundreds of millions of workers becoming more dependent on the federal government for their basic quality of life! Trillions of dollars currently locked up in pensions and 401(k)'s that will suddenly become available to finance the trillion-dollar annual deficits the government is expected to run starting next year! What isn't there for a big-government liberal to love?

To be sure, the last couple of months have served as a wake-up call to anyone who thought that investing in the stock market is a can't-miss proposition. Unfortunately, this is leading quite a few people to the very worst conclusion; namely, that the unavoidable risk that comes with any aspect of human existence serves as a justification to banish risk by government fiat, and that personal responsibility is trumped by promises of security.

"What people want from their pensions is guaranteed income for life,"Ghilarducci says. Actually, there is no end to what people probably want. As my favorite high school teacher taught me long ago, economics is the study of allocating finite resources among infinite desires. Unfortunately, modern liberalism has degenerated into the business of denying the former by pandering to the latter.



Post script: I employed a 401(k) calculator to determine whether a 25-year-old worker with zero savings and an income of $50,000 per year would be better off with a guaranteed return of 3 percent above inflation or the average stock market return of 7 percent above inflation, aided by the standard 50 percent match that most companies offer on employees' first 6 percent of income. The score after 35 years: $859,086.47 for the 401(k) and $286,927.89 for Ms. Ghilarducci.