I am not a financial professional so hopefully someone else will chime in, but...
My understanding is that your 401k can't be pilfered directly by the government since they don't hold it. This is different from pensions where the company actually held the pension money and changing the terms led them to actually take it.
The government CAN get at your 401k money using the same technique you are calculating against with respect to ROTH accounts. That is, since it is tax deferred, you're essentially betting that you'll be in a lower or at least equivalent tax bracket compared to current when it comes time to pull that money out.
It's conceivable that they just up the tax rates enough that when it comes time to pull your money, the government can get at as much of your funds as it likes based on taxes alone.
I'm sure there are other risks involved, but that seems like the most obvious.
Since the 401(k) laws are federal laws within the IRS, couldn't that law be changed at any time by the federal government? Based on history, it seems naive to think that trillions of dollars sitting in retirement accounts would not be eventually re-purposed.
How is that any different from social security though? Social security taxes are being taken out of every american's paycheck as we speak. Yet, anyone under the age of 40 or so has no illusions that social security will be solvent by their retirement age.
It's possible because you don't have a Social Security balance. There's no statement that says "you personally have $250k in your account" like a 401(k) or IRA does. So, no one notices when Congress goes fishing in it.
Frankly, I (34) do think it'll be solvent by my retirement. It'll still have funds to pay about 3/4 of current benefits without changes to the system. As it gets closer, political change will likely get easier as Congress doesn't want lose their cushy jobs en masse.
I actually get a letter from the government every year showing how much money I have put into the social security trust, and how much I can expect when I retire if I keep putting in the same amount as I did last year.
Ultimately since it's a huge trust fund of course there's no "You have X money in the bank", but it does say I should expect "X money per month" when I retire. It'd be nice if it showed details of the trust fund overall.
I get those too. Note that nowhere does it claim the amount you paid in is your balance. Your benefits won't go up if you retire at 100 years old. Your benefits won't run out if you live to 500. It's not like a 401(k) or IRA, where you have $x dollars in it that's your money and have to budget your withdrawals.
They won't update the "amount you will get" to reflect Congress dipping into the fund. The statements operate on the "if everything continues to go well" basis, and so what Congress does isn't reflected on them. No one gets their next statement and asks "hey, where'd my money go?"
That's why it's politically safe to raid, at least in the short term.
> They won't update the "amount you will get" to reflect Congress dipping into the fund. The statements operate on the "if everything continues to go well" basis, and so what Congress does isn't reflected on them.
Right.
They do say, "Your estimated benefits are based on current law. The law governing benefit amounts may change. Congress has made changes to the law in the past and can do so at any time." At least.
One way to think of the Social Security fund is that it is invested in one of the safest instruments in the world: loans to the US government backed by their "full faith and credit".
What's going on is that the tax-cut crowd is hoping to default on those loans so their taxes don't have to be raised to pay it back. Part of their political strategy is convincing young people that the fund will disappear for unexplained reasons, or that it's not really a fund. It's part of a long-term, multi-generational plan to transfer tax burden from the wealthy to the <$100k crowd that started with Mr. "lower taxes" Ronald Reagan increasing the SS tax.
Another possible way is means testing. If you've saved enough for retirement on your own, you don't get social security. Personally I think this scenario is one of the more likely ones.
I hope not. One would have to exclude benefits to a lot of people who have been paying the top tax rate for SS to save any significant amount of money. In effect, this would be a retroactive tax. SS has never been a means tested program.
See also:
> Social Security benefits are relatively evenly distributed among retirees. The vast majority of benefits go to people who are low- or middle-income by any standard. This means that a means test that is focused on taking back benefits from upper income retirees is likely to raise very little money...
> This suggests that means testing is not an effective route for reducing the cost of Social Security.
You raise a very good point that means testing wouldn't save very much money unless the cutoff was very low and cut into middle-income retirees.
So perhaps my guess about this is wrong. It just seems so politically easy though. "Why should millionaires get SS benefits while the middle-class suffers?" is a good sound bite.
Changing the law would mainly affect older people. And older people vote in very high percentages. Politicians are very, very careful about doing things that will make older voters angry.
This doesn't make sense to me. The entire point of Roth is that you pay tax up front, and then the retirement proceeds are tax-free (assuming you withdraw after proper age, etc.). To then go and tax these withdrawals is basically neutering the entire Roth deal - I think there would be some pretty major political backlash on that.
What is the percentage of Americans with assets in a Roth IRA compared to the number of Americans who would rather see someone else pay for a tax increase? Politically, altering the deal on Roth IRAs could work out quite well.
I don't know the answer to that, or about Roth 401(k) plans, but I think there are a lot of people overall with one or the other. I think that threatening either would have an effect similar to threats on Social Security, without the justification of it being insolvent.
IMO, at worst, Roth plans could get phased out for new contributions with existing deposits and the tax-free withdrawals honored.
Roth 401k and Roth IRA are taxed now (it is post-tax income you contribute). Traditional 401k is taxed when withdrawn. I believe you have it backwards.
My understanding is that your 401k can't be pilfered directly by the government since they don't hold it. This is different from pensions where the company actually held the pension money and changing the terms led them to actually take it.
The government CAN get at your 401k money using the same technique you are calculating against with respect to ROTH accounts. That is, since it is tax deferred, you're essentially betting that you'll be in a lower or at least equivalent tax bracket compared to current when it comes time to pull that money out.
It's conceivable that they just up the tax rates enough that when it comes time to pull your money, the government can get at as much of your funds as it likes based on taxes alone.
I'm sure there are other risks involved, but that seems like the most obvious.