The Retirement Accounts We May Have Had... And Why We Should Be Thankful We Don't

  • A transfer of retirement accounts to Wall Street and hedge funds

  • An account you can not access or control except with retirement withdrawals

  • Past proposals have included a 50% death tax

While the reporting of the presidential election has been light on policy, WikiLeaks has provided valuable insight to the people Hillary Clinton was looking to for economic policy, and perhaps even what we could have expected for our retirement accounts based upon the life work of her advisors.

Hillary Clinton’s “chief economist” according to a recent WikiLeak post may be Teresa Ghilarducci. Ghilarducci as an advisor in any capacity indicates that there is an interest in the nationalization of retirement accounts, which has been the main push of her academic writing. As what looks now to have been the trial run for a push for retirement nationalization Ghilarducci recently published a book with a new version of her idea. The new version, nothing like prior, has taken a page from the ACA on how to have industry support nationalization of retirements – promise them they can profit from mandatory customers who will have no way to avoid contributing.

Clinton had not publicly named Ghilarducci as an advisor, but speculation was high for the least year and before the release of John Podesta’s emails by WikiLeaks that the New School professor and self-proclaimed “retirement expert” was an inner member of policy circles. In an email published by WikiLeaks on Friday, November 4th Ghilarducci was named in a message to Podesta from brother Tony as Hillary’s “chief economist.”

The nationalization of retirement savings accounts has been the focus of Ghilarducci’s career with Guaranteed Retirement Accounts (GREs) – a “private account” to supplement the Social Security system, funded by a mandatory payroll tax, which would certainly eventually replace the current system of 401(k)’s, IRA’s, and other privately owned investment accounts. GRE balances would be managed entirely by government selected investment managers, and only accessible via a monthly payment at retirement.

In the crisis of Americans to save for their futures, Ghilarducci presents a picture that is far bleaker than other professionals and studies suggest. A mandatory savings account is necessary to Ghilarducci since she sees the median retirement account balance for those approaching retirement as being close to $12,000 (though her calculation for some reason excludes 401(k) balances). “Median household-level financial assets of unemployed workers over 55 are only $2,000. In contrast, newly self-employed older workers have average financial assets of $25,000, and older employees $10,000.” A 2015 Transamerica study finds the average total household savings for unmarried retirees was closer to $53,000, while married retirees held a median balance of $225,000, while not enough for most, it shows a significant discrepancy with Ghilarducci’s data. Fidelity frequently publishes median retirement plan balances, and their second quarter figures for long-term savers in IRAs and 401(k) plans are closer to $90,000.

Central to Ghilarducci’s plan is a personal fear of the market economy. Ghilarducci opines for the days when pension funds paid steady income streams to workers but makes no mention of the current state of pension funds with their cost, graft, and mismanagement across the spectrum of union, government, and corporations alike. Savers with 401(k) and similar accounts have had the ability to grow their wealth beyond what was available, and create private pension streams that keep up with inflation and avoid the problems that have plagued the private and government pension systems. Many individuals today leave these systems if provided the opportunity as they know the high risks associated with lack of control over their future income streams.

While our retirement system is not a free-market solution and government rules and regulations continue to add burden and cost on the employers who offer accounts, there are many positive aspects of the current system that Ghilarducci ignores in her proposals. While Ghilarducci writes off the 401(k) defined contribution plan as an ‘accident’ of the tax code, she never acknowledges this accident has allowed many a way to grow their wealth beyond what was previously available in pensions, and pass on any excess wealth to survivors and charity. Past versions of Ghilarducci’s GRE plan allow for a return of only half of an individual’s balance at death, imposing a new 50% death tax on every working American.

Following the same plan that enticed the insurance industry to support the Affordable Care Act by mandating their product to the masses, backers of the GRE may have found the model in Ghilarducci’s relationship with the hedge fund and private equity industry for the partner that will profit from a market they could not access previously – the American non-millionaire.

Ghilarducci – in her latest version of the plan – now recommends investments similar to those of pension funds that claim to offer more stable yet high returns. The recommendation to use these complex and high-cost investments would result in massive opportunities for well-connected hedge fund providers, as these products and strategies are currently banned from sale to the average American with less than one million dollars in net worth.

There already is an example of this relationship between GRE’s and private investment firms succeeding in California. The state is slated to mandate some version of the GRE to workers without a workplace plan in 2018. The plans are backed by hedge-fund supporters, just as Ghilarducci’s latest version of her national plan is by co-author BlackRock President and COO Tony James.

The California plan is a mandatory 3% tax, which may automatically increase by 1% per year up to 8%. According to the state website government bonds will make up the investment mix for the first three years, an entirely inappropriate investment for a young saver, but also for the older saver who requires diversification from inflation-risk to their Social Security and pension income streams. After three years it will seek to diversify further, no doubt to politically connected investment firms.

Given a national plan tax at 3%, citizens of California and the other states that adopt similar plans will pay up to 11% for a national and state GRE in addition to the 12.4% tax for the failing Social Security system which also will have to rise in some way. Ghilarducci’s 2007 national GRE proposal (still posted at the New School website) was for a 5% tax, and given the low-growth nature of these accounts before fees and the massive costs that will be required to manage such a system, the tax levels here most certainly are being introduced at a lower than necessary rate. Future tax rates – like most taxes – will be higher than the 23.4% that would be taken from workers for these high-cost, low-return government pension and investment schemes.

Though she may not realize it, Ghilarducci’s sales pitches would make her the ideal financial saleswoman that she likely abhors. Hedge funds have long been recognized by financial professionals as having little value to the average investor. Ghilarducci has accepted the sales pitches of these investments in her data that they somehow provide higher returns at lower risk (a claim even the novice investor will recognize as a falsehood). Throughout her writings she cherry picks time periods and data, and with her investment returns she does the same stating that a normal 401(k) plan will earn 3-4% though does not support this number. Financial professions would assume this rate for only the most conservatively invested balances. Meanwhile, Ghilarducci states that her plan will earn closer to 6-7%, while minimizing the massive costs of this new program by saying that it can be handled by the Social Security offices.

The slight of hand with all snake oil financial products isn’t the cost and return that the salesman tells you, it’s the ones he doesn’t. And, this is where most retirement income investment schemes make off with the real payday – by paying less income to the retiree than the market rate. A government plan will have complete control over the incomes of most Americans throughout their lives through this plan. Participants would have no access to these funds in any way but by an annuity income paid in an amount of their choosing, at a time of their choosing, and increasing at a rate of their choosing. All pieces will be delinked from actual investment returns and market-based signals. Investment returns paid to participants and income streams are chosen by the bureaucracy.

The investments in past proposals were low-cost index funds, similar to those run by the government’s retirement savings account the Thrift Savings Plan (TSP), and implemented by the Social Security system. That strategy seems to have shifted with the support of hedge fund backers to their high-cost, low return investments. Since these investments can not be legally sold to most Americans presently it would represent a massive increase. Ghilarducci – who rails against the costs associated with private plans that have financial advisors who are paid in the range of 0.10 – 1.5% on most plans to provide personalized guidance on financial matters – has no problem with removing the individual’s financial advisor and replacing them with a hedge fund manager where costs often exceed 2%.

Given the sales pitch of a higher cost plan, run by investments deemed too high risk today for the ordinary American, and a tax where the rate seems to be adjustable so long as it will pass, it is clear Ghilarducci’s goal is not to create a retirement solution that works to solve a savings crisis, but rather is only to centralize control of our semi-free market accounts to a government controlled and managed system. Whether or not the plan will solve the retirement crisis does not matter to Ghilarducci or her Wall Street and government backers. A government run investment scheme on this scale can provide a new way to reward party backers, fund government through new debt taken directly from American’s retirement savings and cloak it as an “investment account” that will pay them in the future.

For individuals, the ownership of global securities including equities, real estate, and precious metals through the private retirement system has been one of the few places that they have been able to find inflation-adjusted returns on their savings. Wealth creation and the retirement hopes of many have seen vast improvements through market-based competition between market providers. We all should be aware of what may have been the removal of the last shelter from total government control the money, savings, and income for the majority of Americans.


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Detroit, Ann Arbor, and online fee-only, fiduciary financial advisor blog / podcast on retirement, investments, economy, taxes, 401k, 403b, Roth, IRAs