How much would you need to be able to retire comfortably? If you’re not sure of the answer, don’t worry: the Obama administration will answer for you.
President Obama’s FY 20414 budget will be released on Wednesday — two months later than the legal deadline. But thanks to administration leaks, too conveniently released just hours before last Friday’s horrendous employment report, we have some idea what it will contain.
Most of the Obama budget will be the same tiresome mix of higher taxes, higher spending, and budgetary gimmicks that would land any private sector CFO in jail.
Despite the larger fiscal impact of other provisions of the Obama budget, it is hard to match the audacity, paternalism, and economic idiocy of Obama’s plan to limit individual retirement accounts to a maximum of $3 million.
What we know so far offers more questions than answers; the answers we have already are bad and the questions even worse.
Let’s start with what we know. According to a White House statement reported by Politico.com,
The budget will include a new proposal that prohibits individuals from accumulating over $3 million in IRAs and other tax-preferred retirement accounts. Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving. The budget would limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million in 2013. This proposal would raise $9 billion over 10 years.
How will the government prevent the “accumulating” of wealth in a retirement account other than by disallowing contributions to accounts that already have more than the amount Obama says a person “needs” for retirement?
In other words, what if a retirement account was, over decades of work and saving, funded with $1 million in contributions but through the power of compound interest and a few good investments reaches a value of $3 million? Will the administration propose making all further earnings taxable despite being inside a tax-free or tax-deferred account?
Whether taxing what would have been tax-free contributions to a retirement account or taxing earnings in a retirement account, money that would have gone into an investment portfolio and been made available for capital formation for businesses large and small will instead be confiscated by the government.
So 40 percent of that money (presumably someone putting this much into a retirement account is in the top tax bracket) will instead be funneled into the next Solyndra or Fiskar, more aid to the Muslim Brotherhood and the Palestinian Authority, advertisements to support Obamacare, or one of millions of other government ratholes. And that’s without even counting state taxes.
The ivory tower idiot-savants at the White House budget office also suggest that $3 million will create annual income of $205,000. In other words, they are assuming 7 percent returns while 10-year government notes are yielding 1.7 percent. It’s true that returns in the stock market can average 7 percent over the long run. But retirement accounts are rarely 100 percent in stocks -- and they should not be for investors within a decade, and perhaps two decades, of retirement.
Yet this sort of asset allocation assumption is coming from an administration that, every time the subject comes up, tries to scare citizens away from private Social Security accounts by comparing the stock market to a casino, or at least a place far too risky for retirement funds.
New York City Mayor Michael Bloomberg may not understand guns or our desire for Big Gulps, but the man does know finance. In a 2012 New York Times story about New York City’s actuary taking down the assumed rate of return for five city pension funds from 8 percent to 7 percent, Bloomberg said: “The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent. If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”
The article also notes that “companies now use an average interest rate of 4.8 percent to calculate their pension costs in today’s dollars, according to Milliman, an actuarial firm.”
So, using estimates that those who live in the real world use to calculate how well-funded a pension needs to be to provide a particular guaranteed benefit, a retirement account would require over $4.25 million rather than $3 million to generate the $205,000 that Obama says is the most a person “needs” for a “reasonable” retirement income.
It is also worth noting that withdrawals from traditional IRAs are taxable as ordinary income. So, earnings of $205,000 from a retirement account would put the retiree in at least the 33 percent tax bracket, plus state taxes, meaning that at least $70,000, and perhaps more like $85,000 of the retirement income would go to the government, leaving something on the order of $125,000 after taxes. That’s not a bad retirement income but, particularly if there is still a mortgage to pay, hardly extravagant. And if a retiree has health issues, or a grandchild’s college, or even substantial charitable donations she would like to pay for, the amount may not even be sufficient.
But this raises the most important question of all.
Who the hell is Barack Obama to tell Americans what a “reasonable” retirement income is, or how much you “need” in order to retire with a “sufficient” nest egg?
The paternalism of this proposal is astounding, even for this president.
And so is the hypocrisy: According to the Celebrity Net Worth website, President Obama’s net worth has jumped from $1.3 million when he took office to nearly $12 million now, largely through sales of his two books from 2007-2009. During that three-year period, his reported family income exceeded $12 million. The site also predicts that post-presidency “Barack should receive at least $10 million for the rights to his autobiography and between $500 thousand and $1 million per speaking engagement,” adding that if things go well during Obama’s second term and he is as popular after his presidency as Bill Clinton has been, “Barack Obama should be worth well over $100 million at some point in the future.”
And this man is going to tell us a $205,000 income in retirement is “sufficient” and all we “need”?!?
Apparently, since Obama will get fabulously rich without using a well-funded retirement account, nobody else can have one either.
President Obama will frame this as an issue of the “1 percent” versus the rest of us. He will point out that very few Americans will have the opportunity to amass $3 million in net worth, much less $3 million in their personal retirement accounts (since Americans typically have a large proportion of their wealth tied up in the value of our homes.) This is true, but irrelevant.
The class-warfare mentality that oozes through our current president and the leadership of today’s Democratic Party has never been the mindset of the majority of Americans, even while Obama was winning two presidential elections.
The obliging liberals at Bloomberg news have shown the true motivation behind the assault on retirement accounts by titling their recent article on the topic “Obama’s Budget Would Cap Romney-Sized Retirement Accounts.”
Yes, the jealous, private enterprise-hating, perpetually campaigning Obama team is still obsessed with Mitt Romney and people like him who have the gall to make enough money to ensure they will never be wards of the state, the chutzpah to be successful enough to provide, through savings and investment, capital so other entrepreneurial Americans can chase the American dream.
But envy combined with economic idiocy is no way to structure a tax code, fund a government, or encourage a thriving civil society.
The proposal is also a massive betrayal of trust, rewriting the rules mid-game, which is par for the course for this administration but rarely with policy as well-established and popular as retirement accounts (though participants in Medicare Advantage programs may beg to differ).
So when pundits look at the weakest economic recovery in American history, punctuated by the March employment report coming in at less than half of the average estimate of economists, they should not see the sequester or the recent end of the payroll tax break or even the tax hike for the highest income bracket as the primary culprits, though the last two may have had a marginal impact to date.
Instead, American entrepreneurs and investors rationally fear — because they are constantly reminded, as with Obama’s mindless attack on retirement accounts — that this president and his sycophant minions are hell-bent on punishing achievement regardless of the damage they cause to our nation’s economy.
When the president sows bitterness, he cannot expect to reap sweet success.