Talk about a bad idea. Barack Obama and John McCain both want to give people tax incentives to empty their retirement savings accounts. They’d help contribute to a disastrous old age for many middle-class seniors, even as they provide a windfall to wealthy savers.
In the name of relieving financial hardship caused by the economic slowdown, Obama would allow penalty-free withdrawals from 401(k)s, IRAs, and the like of up to $10,000 for the next two years. McCain’s plan, which is even worse, would cut the tax rate to 10 percent on up to $50,000 of withdrawals in both 2008 and 2009. Workers contribute pre-tax money into these accounts and, currently, withdrawals are taxed at rates up to 35 percent.
Both candidates say they are doing this to help recession-strapped families: “Cash into the hands of the people,” as McCain puts it.
I understand that some people do need cash to hang on, though most of them are already in the 0 or 10 percent tax brackets. But talk about eating your seed corn. For millions of middle-class workers, defined contribution plans (along with Social Security) are their largest source of retirement income. The brutal decline in the stock market has already drained many of those assets. A new study by Rich Johnson, Mauricio Soto, and Shelia Zedlowski at Urban’s Retirement Policy Program estimates there was only about $89,000 in the typical retirement account of those 50 and older as of Sept. 30. There is even less today.
A 65-year-old male could expect to get only about $600-a-month if he turned $89,000 into an annuity. Now, McCain and Obama want to encourage cash-strapped folks to reduce their already-paltry retirement savings even more. McCain, in fact, would make it easy for a typical 60-year-old to pretty much clean out the entire value of his account. And, at that age, it would be nearly impossible to rebuild savings.
Don’t think they'll do it? Even under current rules, as many as two-thirds of workers pull money out of their 401(k)s when they leave their jobs. It is especially a problem with those with relatively small accounts. Give them a tax break and even more will drain their meager savings.
Of course, that will also drive them to sell the mutual funds and stocks they hold in their retirement accounts. I’m not sure we need to encourage anyone to dump stocks at the moment.
Worst of all, however, many retirees would be left with only Social Security to live on. With McCain and Obama’s help, how many of them will be spending their 75th birthdays bagging groceries at the local Piggly Wiggly?
It would be a very different story for the very wealthy.The top 20 percent of earners own more than 70 percent of IRA and 401(k) assets, and, for many of them, the McCain plan represents a terrific opportunity. They could access funds (which they contributed pre-tax in the first place) by paying only one-third the tax they normally would. Without rules to prohibit it, many could withdraw $50,000-a-year from their regular 401(k)s at 10 percent tax and immediately reinvest the funds into a Roth IRA, where all future earnings are tax-free. Others could find equally creative ways to move money around to take advantage of the low tax rate without adding a dime to savings.
No doubt the economy is bad, but ruining the old age of millions of middle-class retirees while creating yet another tax boondoggle for the wealthy is no way to make it better.
