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Thread: remember those IRA discussions ... well get a load of this proposal !

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    Default remember those IRA discussions ... well get a load of this proposal !

    Over the years many discussions have taken place regarding the relative wisdom of dancers in their 20's 'committing' money to 'gov't sanctioned' retirement plans. The upside argument is always that these 'gov't sanctioned' plans allow for the legal avoidance of income taxes in current years. The downside argument is always that such 'gov't sanctioned' plans also allow the gov't to maintain 'strings attached' to your retirement money, that the gov't can change the rules at any time etc. thus contributing to 'gov't sanctioned' retirement plans does involve risk.

    At any rate, with the increasing difficulty the US Treasury is now experiencing in regard to its ability to continue selling newly printed treasury bonds at near zero interest rates ( i.e. historical foreign buyers like China and Japan have stopped buying ), a 'new' proposal is now being seriously discussed in Washington in regard to IRA's / 401k's etc.



    (snip)"Lawmakers have proposed changes, and the Obama administration will seek ways to promote conversion of 401(k) accounts after their average value fell in the past three years alongside a 46 percent drop in the Standard & Poor’s 500 Index.

    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, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are leading the effort.

    Tax Benefits

    The institute’s member companies manage $11.6 trillion of assets in mutual funds, including employer-sponsored 401(k) accounts. Some lawmakers have questioned the public-policy value of the tax benefits for people investing in retirement accounts, the ICI said in a report today.

    U.S. direct-contribution plans, which include 401(k) and other employer-sponsored retirement programs, held about $3.6 trillion as of mid-2009, according to the report. They account for 25 percent of total U.S. retirement assets. Annuities, with $1.4 trillion, represent about 10 percent of U.S. retirement funds.

    Annuities are “very expensive” and there’s “no ability to tap them if you have an emergency,” John J. Brennan, former chairman of the Vanguard Group, the biggest manager of stock and bond funds, said on Bloomberg Television today.

    No Missed Payments

    The guaranteed stream of retirement income from annuities is attractive amid fluctuating 401(k) values, said Cathy Weatherford, chief executive officer of the Insured Retirement Institute, a Washington-based trade group.

    “The financial crisis has left millions of people desperately wanting answers on how to protect themselves and some hope of a secure retirement,” Weatherford said. “Throughout the crisis, not one annuity provider ever missed a payment.” (snip)


    According to both Bloomberg pundits and some professional investors, the bottom line on this new proposal is as follows. On the premise of needing to 'guarantee' an adequate income stream for financing of retirement, holders of IRA's / 401k's etc. would be required to shift some amount of their total 'gov't sanctioned' retirement fund assets into financial instruments that are 'guaranteed' to be able to provide X percent of interest income ( and consequently out of other financial instruments which are potentially subject to market losses ). Where the gov't is concerned, there is only one financial instrument that meets this criteria ... US Treasury bonds !!!

    From the gov'ts standpoint, forcing such a shift in IRA / 401k asset allocation would guarantee the gov'ts ability to continue printing and selling new US Treasury bonds at near zero interest rates because it could essentially force contributors to IRAs / 401k's to become a 'captive market' of buyers. Historically speaking, this has already been done in other countries like Argentina ( who also faced a scarcity of foreign bond buyer interest as their currency / economy began going to hell circa 2001 )

    From the IRA / 401k account holders standpoint, forcing such a shift would

    A. restrict the ability of account holders to allocate retirement assets to non-US dollar denominated investments ( thus restricting ability to 'hedge' against future loss of US dollar purchasing power )

    B. restrict the ability to 'cash in' IRA / 401k assets before legal retirement age, penalties or no penalties ( since new rules would probably require that US Treasury bond durations more closely match the account holder's actual retirement age )

    C. restrict the number of stock shares and corporate bonds that will need to be 'sold off' as baby boomers start reaching retirement age and start 'cashing in' their IRA / 401k accounts ( thus minimizing future US stock market downside risk ).

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    Banned Melonie's Avatar
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    Default Re: remember those IRA discussions ... well get a load of this proposal !

    here's a more detailed / opinionated analysis from Karl Denninger ...



    (snip)"In a short conversation this noontime that CNBC apparently has omitted from their archives (Why's that folks?) Rick Santelli was talking about a potential to effectively force money into the Treasury market.

    Where would they get this?

    From your 401k and IRA accounts!

    From Businessweek:

    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, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

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

    Forcing people into Treasuries as an "annuity" is exactly what Social Security allegedly is. Except that Treasury stole the money that was collected in FICA taxes and spent it!

    Guess what? They'll do that here too - you're going to "invest" in Treasuries which of course are effectively a CALL option on the future taxing ability of the government.

    The problem is that with an aging population and the immigrant problem (illegal immigrants that is), along with offshoring, the aggregate wage base will drop and thus this is the most dangerous investment of all!

    What's even worse is that the government has intentionally suppressed Treasury yields during this crisis (and will keep doing so by various means, including manipulating the CPI - the "inflation index" - as they have for the last 30 years) so as to guarantee that you lose over time compared to actual purchasing power.

    THIS HAS BEEN THE CASE SINCE THE 1980s AND IT WILL NOT CHANGE!

    I have been talking about this for quite some time and recall writing a Ticker on it a year or more ago, although I can't find the entry immediately.

    Let me be clear:

    I have no quarrel with the government mandating that you have a choice in your IRA or 401k account to buy short-duration Treasuries - much like the "G" fund that government and civil-service workers have.

    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.

    You can bet this won't be good for you, the ordinary American.

    You can also bet that once such an "option" is made available there is a very high probability of the government doing things that either promote or simply don't stand in the way of another stock market crash as a means of "herding" your money into Treasuries - so they can blow it - all under the guise of being allegedly "safe".

    Of course this begs the question - what if the government can't pay down the road when you retire, just as they can't pay on a forward basis with Social Security and Medicare?

    This "proposal" can only mean one thing - Treasury smells smoke. Maybe you should pay attention to what they're huffing!"

    And before you say "oh they'd never do that" I want you to read this: [ 'Argentina siezes pension funds to pay debts - who's next ? - sic ]

    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....

    .... My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so. The forced-feeding of banks with fresh capital – whether they want it or not – and the seizure of the Fannie/Freddie mortgage giants before they were in fact in trouble (in order to prevent a Chinese buying strike of US bonds and prevent a spike in US mortgage rates), shows that private property can be co-opted – or eliminated – with little due process if that is required to serve the collective welfare.



    Any questions?

    PS: If the video shows up I'll update this ticker.... and if you're wondering what hammered the dollar starting at about 9:00 today, this is probably it. Such a "move" would free the government to further abuse the issuance of Treasuries rather than take necessary austerity steps and places us even further down the road toward a political and economic collapse.
    (snip)


    Again from the standpoint of a current IRA / 401k account holder, if this proposal comes to pass you will be faced with a huge dilemma ...

    - 'cash in' all or part of your IRA / 401k assets immediately to avoid the forced conversion to US Treasury bonds ... and in the process pay a 10% tax penalty for early withdrawl plus 10-20-30% capital gains and/or ordinary income taxes due on the sale of those assets ... PLUS pay an elevated tax rate on your current income ( because the IRA / 401k asset sales will ADD to your current year's total taxable income thus pushing up your tax bracket )

    or

    - allow all or part of your IRA / 401k assets to be converted to US Treasury bonds, which will guarantee that you will receive a 3% or whatever interest income in all future years ( but does nothing to guarantee that said interest income will be able to actually have the purchasing power to fund your retirement due to 100% exposure to US dollar devaluation ), AND

    - forfeit your future ability to 'cash in' all or part of your IRA / 401k assets prior to reaching retirement age, emergencies non-withstanding

    ~
    Last edited by Melonie; 01-09-2010 at 03:37 AM.

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    Default Re: remember those IRA discussions ... well get a load of this proposal !

    There is zero chance that there will be a federal mandate that will force you to convert all of your IRA and 401k money into T bills. The second guy you quoted is something of a nutjob. Even if the Government had any appetite for such a proposal (which they don't) it would be an obvious economic disaster. It would take $15 trillion dollars out of the stock market and would result in a total economic meltdown -- the removal of that much capital from the markets would likely completely destroy our entire system.

    The most extreme proposal that anyone has seriously discussed would require the allocation of some relatively small percentage of your IRA into a fixed yield account and even that has been met with extreme resistance and would appear to be a complete nonstarter. The current discussions involve attempting to find ways to encourage people to consider some fixed yield investments.

    I understand that people don't trust the government and lord knows there are plenty of idiots involved, but if you look at the realities it is pretty clear that they are unlikely to take such dramatic action. For example, they completely control the retirement accounts of federal government workers. Once upon a time, they had no independent investment alternatives, it was all a centralized pension plan. Today, they have the equivalent of a 401k plan (the Thrift Savings Plan) -- even in that plan, which offers T bills as an option, their own employees are allowed to buy into any funds they wish. Since they can change that plan so easily, you would think it would change well before any effort to change it for all 401k plans nationwide.

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    Default Re: remember those IRA discussions ... well get a load of this proposal !

    you should read more ...

    (snip)"The News Observer reports on a new in-state investment pool for the state retirement system.

    State Treasurer Janet Cowell is starting a $250 million equity fund to invest in North Carolina companies with two goals in mind: make money for the state pension fund and create jobs in North Carolina.

    Cowell's office is scheduled next week to announce the investment firm that will manage the fund.

    The legislature this year passed a law, at Cowell's request, giving her more flexibility in managing pension fund investments so she could establish the Innovation Fund. The fund is set up to invest up to $250 million in companies that have "significant operations in North Carolina," according to the request for proposals from investment firms.

    Before posting further, I should disclose that I am currently enrolled in the state pension system, so I've got a dog in this particular fight. However, anyone who is a North Carolina taxpayer also has a stake.

    At first glance, the proposal looks great. Investments inside North Carolina offer a potential two-fer in that the retirement system could reap the investment returns, while the investments themselves add to the state's economy and tax base.

    However, a closer examination reveals serious downsides.

    The primary goals of the pension fund manager should be to maximize the fund's returns while minimizing risks associated with those returns. Prudent fund management provides security to current and future retirees who depend on the fund. It also reduces costs to taxpayers who are ultimately on the hook for the obligations of the fund.

    Absent this special fund, nothing prevents the Treasurer from investing in North Carolina companies and projects--so long as they meet the retirement system's other objectives. If an investment, inside or outside North Carolina, can yield a competitive return, the Treasurer should be on it.

    However, by setting a firm dollar amount of $250 million, the state is indicating that the Treasurer wouldn't have found this many worthwhile in-state projects through its normal procedures. This suggests that the state is going to invest in at least some in state projects with returns that are less than competitive. Either the policy is pointless ($250 million would have been invested anyway) or it results in over-investing."(snip) from


    The point of course is that gov'ts can and do consider 'gov't sanctioned' retirement account money as not fully 'belonging' to the individual account holders until those account holders actually reach retirement age ! As such, gov'ts can decide to 'change the rules' regarding how the money held in 'gov't sanctioned' retirement accounts is to be managed / invested - and tend to do so for the benefit of the gov't as opposed to the benefit of the account holders. And as was the case in Argentina last year, the US gov't has much more to lose from a US Treasury bond market rout spilling over into much higher interest rates - thus huge gov't losses on Fannie / Freddie / TARP collateral holdings, thus huge new interest costs for the gov't to 'roll over' existing short term Treasury debt ( something like 50% of all outstanding US Treasury debt now has a maturity of one year - and the gov't obviously can't afford to pay off this principal ), thus huge increases in all inflation adjusted gov't costs from SSI retiree checks to CSEA gov't employee paychecks, etc. If push comes to shove, another 40% drop in the US stock markets resulting from an IRA / 401k rule change is a lot easier to 'explain' ... and particularly so when some 50% of US voters have little or nothing in regard to personal 'skin in the game' where the US stock markets are concerned.


    Agreed that this federal IRA / 401k proposal is unlikely to force the immediate liquidation / reallocation to US Treasury bonds for 100% of existing stock shares held by existing IRA / 401k accounts, for the reasons that both you and Karl Denninger state. However, that isn't to say that the proposal couldn't force some percentage of FUTURE IRA / 401k contribution money to be mandatorily allocated to US treasury bond purchases. That isn't to say that the proposal couldn't force an increasing percentage of existing stock shares held by existing IRA / 401k accounts to be liquidated / reallocated to US Treasury bonds as the years go by.

    ~
    Last edited by Melonie; 01-09-2010 at 07:37 AM.

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    Default Re: remember those IRA discussions ... well get a load of this proposal !

    You can tap into some annuities for certain emergencies. Since annuities are a contract with an insurance company, each company can choose such situations. However, for the most part, they are only for medical emergencies, and usually for those over age 65. So, you're right.

    However, annuity insurers have it within their power to change the details of their contracts to allow a more flexibility, especially if this passes and they see their annuity business skyrocket.

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    Default Re: remember those IRA discussions ... well get a load of this proposal !

    ^^^ It's important to differentiate between a private annuity contract outside of a 'gov't sanctioned' retirement account that is free to invest the money however they see fit, and the proposed gov't IRA / 401k rule change that would force the purchase of X percentage of US Treasury Bonds or other 'guaranteed return' investment instruments. As you point out, today's 'free standing' private annuity contracts already severely restrict the annuity holder's ability to access their money (principal) outside of the originally contracted payout dates and amounts ... despite the fact that the private annuity money (principal) may actually be invested in highly liquid corporate 'paper'.

    Undoubtedly the gov't will make the case that private annuity contracts are only as 'good' as the private entity that backs the contract. Or put another way, AIG would have defaulted on all of its annuity contracts if not for the gov't bailout it received which allowed it to avoid bankruptcy, and Lehman Brothers DID default on their annuity contracts when they went bankrupt ( with contract holders eventually receiving pennies on the dollar). Thus if any private annuities are to be included in future IRA's / 401k's, those private annuities must be invested in a 'guaranteed' source i.e. US Treasury Bonds. Of course, this achieves the same purpose for the gov't i.e. increased purchase of new US Treasury bonds at comparatively low interest rates by the annuity manager, with the addition of the private company middle-man managing and extracting a small profit from said annuity !.

    Of course the larger question is whether or not US Treasury bonds actually comprise a 'guaranteed source' of future income. Obviously, things can be arranged such that future US Treasury bonds can be guaranteed to pay X number of future US dollars. However, this may or may not correspond with those X future dollars actually being able to buy food, pay rent, pay utility bills etc. after 20-30-40 years of US dollar decline / price inflation. Even the venerable Allen Greenspan agrees with this point ... and so stated in his famous 'the gov't can guarantee future payments, but the gov't cannot guarantee the future purchasing power of those payments' congressional testimony several years back !

    ~
    Last edited by Melonie; 01-09-2010 at 09:17 AM.

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    Default Re: remember those IRA discussions ... well get a load of this proposal !

    Sounds like a whole bunch more financial engineering to me. I think most of main street is wise to financial engineering schemes as ways to plunder one's savings and incomes. They have done it with pension funds, stock market IRAs, real estate "investing," and smaller tricks.

    Then of course, we are talking about a population who believes it their duty to remove their shoes before boarding an airplane.

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    Default Re: remember those IRA discussions ... well get a load of this proposal !

    ^^^ I hear you there. But, for better or worse, I'll again remind you that 50% of US registered voters don't have much of anything at stake in the way of IRA / 401k savings ... or for that matter savings of any sort ! Thus any proposed change in IRA / 401k account rules is now likely to be viewed in a similar vein to proposed changes in private health insurance rules ( i.e. a Cadillac tax on wall to wall health insurance coverage), in a similar vein to proposed changes in Social Security taxes ( i.e. removing the earnings level 'cap' on which SSI taxes will be collected ), in a similar vein to proposed changes in income tax rates ( i.e. an increase on those who earn more than $75k per year a.k.a. expiration of GWB's tax cuts).

    In other words, such proposed changes wouldn't have any IMMEDIATE effect on those Americans who are unemployed or earning less than $40k per year ( who can't afford to contribute to an IRA / 401k retirement plan and still pay their bills !). At the same time, such proposed changes would theoretically enhance the US gov'ts ability to keep providing them social welfare benefits, unemployment benefits, 'cash for clunkers'-like 'free' money etc. As such, they have little to lose and theoretically something to gain by supporting program changes that will only affect other Americans who are 'able to afford' the additional cost of said changes.

    Of course, with the real underlying issue being the ongoing ability of the US gov't to print up new dollars and new US treasury bonds without killing the dollar or spiking US dollar interest rates, the flip side is of course that the 'poorest' 50% of Americans actually have quite a bit to lose by NOT supporting such proposed changes. If the US gov't does in fact lose its ability to continue selling new US Treasuries at low interest rates, this would divert existing gov't tax revenues toward much higher debt service costs ( i.e. taking money away from social spending ), thus would increase prices for food / energy / WalMart-esque imported products without an offsetting increase in unemployment checks or food stamps etc. - which WOULD have an IMMEDIATE impact on the standard of living of those 'poorest' 50% of Americans.

    Combining this with the above, the gov't should have no problem 'selling' this proposal. After all, there is now a 'glowing' example of what is likely to happen if such a proposal isn't adopted before foreign buyers of gov't bonds lose confidence and stop buying ...



    (snip)"CARACAS, Jan 9 (Reuters) - Venezuelans rushed to the shops on Saturday, fearful of price rises after a currency devaluation that will let President Hugo Chavez boost government spending ahead of an election but feeds opposition charges of economic mismanagement.

    In a bid to jump-start the recession-hit economy of South America's top oil exporter, Chavez on Friday announced a dual system for the fixed rate bolivar.

    It devalues the currency to 4.3 and 2.6 against the dollar, from a rate of 2.15 per dollar in place since 2005, giving the better rate for basic goods in an attempt to limit the impact of the measure on consumer prices.

    The opposition seized on fears that prices for imported goods will double as shoppers formed lines of more than a hundred people outside some stores in the capital Caracas."(snip)

    ~
    Last edited by Melonie; 01-10-2010 at 05:16 AM.

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