Can the government make you get an IRA?

Commentary about business and finance.
Jan. 28 2010 6:14 PM

Can the Government Make You Get an IRA?

Probably, but that doesn't mean Obama's proposals will help workers.

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In reality, the R-bond will probably never see the light of day. The term has barely crept into the mainstream, but conspiracy-mongers have already latched onto it as a supposed example of government confiscation of private funds, pointing to Argentina's 2008 nationalization of the country's pensions to gain access to badly-needed capital. It sounds crazy, but given the level of credence other wild-eyed theories ranging from the President's birthplace to "death panels" have commanded, it would probably be an ill-advised use of political capital to try and push through the R-bond.

A second facet of this nationwide retirement plan is an improvement of the credit offered to low- and moderate-income workers who invest pre-tax dollars into a retirement plan. The previous credit was nonrefundable, meaning that if a worker made too little to itemize or pay income tax, he or she got nothing. Now, the government will offer a 50 percent match for the first $1,000 in employee retirement contributions every year, so long as the family's annual pay stays under $65,000. (Above that, it's gradually phased out for incomes up to $85,000.) The money goes into the IRA, so even people who don't itemize or pay income taxes will be able to reap the benefit. This would not only help low-income workers, but would provide an incentive to new college grads earning entry-level salaries.

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The final plank of this platform is a push for workers to convert their retirement investments into annuities. Unlike a traditional pension, 401(k) contributions are available at retirement as a lump sum or in the form of monthly payments for a fixed period of time. Either option comes with the danger that the money can run out before the beneficiary dies, a danger brought into sharp relief when the drop in the stock market eviscerated many Americans' nest eggs. According to a survey by Prudential Financial of more than 1,000 employees, 65 percent of those age 45 to 64 said they plan to delay retirement because they can't afford to stop working.

Annuities are a good alternative in theory, but implementing a nationwide plan for their use raises a lot of logistical and regulatory questions. First, they're an infamously complex type of investment, and the buyer has to take what's essentially a gamble that they won't be hit by a bus before they've made back the money they paid.

The bigger problem is that annuities are, technically speaking, a form of life insurance. They're not sold by banks or brokerage firms; they're sold by companies like—and including—AIG. Since insurance is only regulated at the state level, there's nothing like an insurance version of the FDIC that protects bank deposits. The states do have their own regulatory agencies and risk pools, but there's no standard—and no guarantee that a major insolvency wouldn't overwhelm a state program.

To some, the natural solution would be to regulate insurance agencies at the federal level, but that's a political third rail the Administration probably won't want to go near. Some sort of federal reinsurance program is also a possibility, but it's also likely to meet resistance from the industry and the anti-regulation camp. The same contingent that views automatic IRAs as a stealth appropriation of private funds sees much the same bogeyman in mandatory annuities.

Some are already calling these initiatives another outright giveaway to the financial sector. The fear that Wall Street will collect some of these funds shouldn't be enough to abandon the idea. America's retirement is a shambles, and the problem is only going to get worse once boomers start retiring in droves. But legislators will need to make sure that these new programs come with enough regulatory fencing to keep industry interests from running roughshod over the funds with which they're entrusted.

Explainer thanks Dean Baker of the Center for Economic and Policy Research, David John of the Heritage Foundation, Olivia Mitchell of the Pension Research Council at the University of Pennsylvania's Wharton School and Alicia Munnell, director of the Center for Retirement Research at Boston College.

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