Nationalizing our 401k's

Of all the economic possibilities I've mentioned to people, the one that gets the quickest "No, that'll never happen" reply is when I suggest the government will nationalize our retirement accounts. By "nationalize" I don't mean outright confiscation-- I am not saying they'd simply seize the contents of our 401k's. But they might, for instance, mandate certain investments: we'd all have to buy our fair share of Treasury bonds. They might limit withdrawals, limit investment options, and/or impose egregious fees and taxes. In short, the government may begin controlling our retirement money in ways which amount to a de facto nationalization.

They are not, obviously, going to use the word 'nationalization.'

The power elite are masters of the incremental approach. You don't just suddenly announce you're going to make all airline passengers go through roughly the same treatment afforded to incoming prisoners. People would be outraged. No, you just slowly introduce one damned thing after another until you arrive at the prisoner treatment, having suffered no more public protest than a bunch of kvetching. Similarly, they aren't going to suddenly impose 20 new controls on our retirement accounts, but you can bet it's at the end of their road map.

And so it begins:

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams....

It sounds so innocent. Convert your retirement into a simple, safe annuity that pays you X amount on a set schedule, and you never have to worry about a stocks crash again. But what exactly will they be putting your money into, behind the scenes, in order to guarantee you those safe, set payments?

Treasuries. Which they're having a hell of a time offloading just about now.

Here's Karl Denninger's take (boldface is his):

Let me tell you what this is - it is an attempt to prevent the collapse of the Treasury market!

. . .

I have no quarrel with the government mandating that you have a choice in your IRA or 401k account to buy short-duration Treasuries....

But - "choices" have a funny way of turning into mandates, and this looks to me like a raw admission that Treasury knows it will not be able to sell its debt in the open market - so they will effectively tax you by forcing your "retirement" money to buy them!

This may be the only way for Treasury to hold down interest rates to something reasonable in the intermediate term, but doing so will instantaneously remove a major source of funding for the stock market - that is, the monthly and quarterly inflows from retirement accounts.

. . .

This "proposal" can only mean one thing - Treasury smells smoke.

Jesse over at Jesse's Café Américain weighs in as well:

As a rule of thumb, the worst possible time to convert lump sum savings into a fixed income annuity would be when interest rates are historically low....

For some reason the Obama Administration is promoting the idea now that there should be some encouragement for Americans to start converting their 401K's and IRA's into annuities, to provide themselves with lifetime income.

Interest on your savings, currently, is just about zilch. Why lock in that crappy interest rate by converting to an annuity? You'd be turning your money over to the government in return for payments which would not keep up with inflation. You'd have less and less purchasing power as time went on. This is not being done for the benefit of the American people.

And it's not just the people who already have retirement accounts. If you don't have any retirement funds, don't assume this won't affect you.

Jesse highlights an article from last June which suggests that the Obama administration wants to mandate retirement contributions:

Officials in the Obama administration are moving quickly to develop the investment infrastructure behind the president’s proposal for mandatory automatic enrollment in individual retirement accounts, which could be supported by the creation of Treasury-issued retirement bonds [emphasis mine].

J. Mark Iwry, deputy assistant secretary for retirement and health policy at the Department of the Treasury, said that administration officials are exploring some “conservative” options for investing the assets of 78 million Americans that he estimates could be automatically enrolled in this “universal” workplace retirement system.

The initial proposal allows for employees to opt out of the plan, but I'm skeptical about that. Consider that some versions of the health care bill suggest prison time for not buying insurance, even though insurance may cost up to $15,000 per year per family. Now consider how likely it is that employees will be allowed, without penalty, to opt out of the retirement plan. Not too likely, in my opinion.

No... the US Treasury wants its cut of the money made by 78 million Americans who do not currently save for retirement. Your sole option, initially, may be to purchase "R bonds" (government retirement bonds), with the ability to "graduate" to other conservative funds once you've saved enough money. Your distributions will come in the form of an annuity, with no say over the rate of draw-downs. If that isn't nationalization then I don't know what is. This will not be the plan for everyone, but once it's the plan for some, their foot is in the door. You have to think like an incrementalist. We've got annuity plans, mandatory enrollments, R bonds... you can see where this is going, right?

But hey, keep contributing if you think it can't happen here.

UK Telegraph, October 21st, 2008:

Here is a warning to us all. The Argentine state is taking control of the country’s privately-managed pension funds in a drastic move to raise cash.

It is a foretaste of what may happen across the world as governments discover that tax revenue [is plunging], and discover that the bond markets are unwilling to plug the gap....

President Kirchner has been eyeing the pension pool for some time. Last year she pushed through new rules forcing them to invest more money inside the country – always a warning signal.

My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so.