Assorted links

by on November 27, 2012 at 12:13 pm in Uncategorized | Permalink

1 JWatts November 27, 2012 at 12:42 pm

#4. Should we kill the 401(k)?: It seems like the underlying study only looked the very next year to see if there were changes to the rate of savings and only the richest tax payers were affected. I don’t think you can go from the richest Danes lost a tax benefit to savings and didn’t stop saving at the same rate the very next year to “should we kill the 401(k)”. That’s a pretty big leap.

2 john personna November 27, 2012 at 12:49 pm

We have a multivariate equation in the US: Tax deferred accounts, Employer contributions, Management fees (and agency issues), and a particular scheme for interest, dividend, and capital gains taxes, as well as tax exempt investment vehicles. I’d love to see 401(k)s eliminated for fee/agency issues alone, but we’d need a balanced (let argument begin) policy for investment returns.

3 JWatts November 27, 2012 at 2:09 pm

I’d like to see deductions in the Federal Tax code greatly reduced, but I think at this point the only politically viable solution would be a deduction cap of some sort. However, that being said, I hadn’t really considered the front loaded deductions, such as healthcare insurance, 401K, etc.

4 Spencer November 27, 2012 at 3:09 pm

The 401 and other tax incentives for savings have failed miserably.

Over the time they have been applied the savings rate has plunged to almost zero, just the opposite of what theory calls for.

Actually, there is another theory that many savers have an objective — a million dollar stock portfolio at retirement for example — and if you increase the rate of return earned on the savings, than savers can achieve that objective with less savings. If this is a valid theory than you would expect providing tax breaks for savers to lead to less savings — exactly what has happened over the past 30 years.

The 401 is another clear example of a failed conservative -libertarian economic theory.

5 JWatts November 27, 2012 at 3:29 pm

I’m somewhat surprised how anyone would classify the 401K program, which is a reward for engaging in governmental approved behavior, as a libertarian economic theory?

6 Cliff November 27, 2012 at 8:11 pm

Ah, then I guess we should tax savings, since it will have no effect on behavior.

7 derek November 27, 2012 at 9:20 pm

And just think how much more revenue would come from getting rid of this unused provision.

8 somaguy November 27, 2012 at 3:25 pm

While I disagree with the article as a whole (that the presence of 401(k)s is in part responsible for a budget shortfall) these accounts have other more serious problems. I opted out of my employer-provided 401(k) because of the basic math involved. Given that I expect my tax rate at retirement to be roughly equal to my tax rate now, paying taxes now vs later is not a big win. Sure I don’t have to pay capital gains, but that’s just 15% in the long term. So it becomes a fight between the 15% cap gains savings versus the higher expense ratios of 401(k)s versus open market funds. Some broad-markets ETFs (SPY comes to mind) have expense ratios below 0.1%, while many 401(k) charge close (or more!) than 1%. Over 30 years it takes just a .54% expense ratio to overcome the 15% one-time hit at withdrawal. So, due to the crappy choice of funds that our employer’s 401(k) provides (and my understanding is that this is not an exceptional case) a regular taxable account beats the “tax advantaged” retirement account. Nevermind that the taxable account allows more flexibility with spending, i.e. if I decide I want to use it to buy a house a few years from now I don’t have to deal with penalties or taking a loan against my 401(k).

9 dead serious November 27, 2012 at 4:13 pm

I contribute to my 401k only to the point where I can take advantage of the company match (3%).

10 malcom digest November 27, 2012 at 6:49 pm

Your 401(k) is invested with pretax money, all those deferred taxes are growing for you.

11 Cliff November 27, 2012 at 8:13 pm

Paying taxes later vs. now is a big win because of the time value of money/discount rate.

12 Cyrus November 27, 2012 at 9:47 pm

But you only defer the taxes by effectively deferring the income. Whatever discount rate you choose, it cuts both ways.

13 somaguy November 27, 2012 at 11:49 pm

Incorrect, by associative property of multiplication.

14 Brian Donohue November 28, 2012 at 8:43 am

Yup. Your analysis does assume 100% in non-dividend paying stocks, which makes sense for a sufficient level of wealth/risk tolerance.

15 ShaneM November 30, 2012 at 12:06 am

Can’t we see presence of retirement accounts as a buffer to prevent greater dependency on the government in old age? I’d think eliminating IRA would likely increase dependency at end life.

16 john personna November 27, 2012 at 12:45 pm

4. Yes, Yes.

17 Andrew' November 27, 2012 at 12:50 pm

4. Revenue neutrally, of course! Oh, that’s not why we are talking about this is it. So, we are talking about it because (1) the government is broke because of a series of mistaken policies and (2) this is one (allegedly) mistaken policy that happens to be a cash source.

So, when should we expect the the discussion to begin on the taxation of our Roths?

18 Brian Donohue November 27, 2012 at 1:12 pm

Discussion of Roth taxation has already begun, at least by me. See: VAT.

19 Rich Berger November 27, 2012 at 1:14 pm

Given the high-handness of the regime and their insatiable lust for spending, taxation and expanding the scope of the government, no private property should be considered safe. You didn’t save that!

20 john personna November 27, 2012 at 1:43 pm

About 1 in 5 didn’t save that: “According to the Investment Company Institute, the percentage of active plan participants with a 401(k) loan increased from 15.0 percent in 2006 to 18.5 percent in 2011.”

21 Rich Berger November 27, 2012 at 1:48 pm

Apparently they did save something, or else there would have been no money to loan. As an expert on 401k plans, surely you know that the amount of loans cannot be greater than the lesser of $50K and 50% of your account balance.

By any chance, were you an Obama voter?

22 john personna November 27, 2012 at 1:54 pm

God in heaven, you are defending a 20% borrowing rate against retirement as rational? I could see it in the face of once in a lifetime emergency, but I do not believe fully 20% of workers are in a once in a lifetime emergency.

With that kind of innumeracy, are you a Romney voter?

23 msgkings November 27, 2012 at 2:11 pm

john, you don’t understand 401k loans at all. Many borrow for a down payment on their home for example, and then they pay it back over 5-20 years out of their paychecks, paying themselves (not a bank) interest in the form of more savings.

Find another club to hit Rich with, you sound ill informed on this one.

24 john personna November 27, 2012 at 2:45 pm

If you borrow and repay a retirement account it will have less in it than if you simply paid into it all the way through. You used it for some other purpose, probably self defeating. Did the law actually encourage smart behavior? No. Nothing useful happened.

25 Andrew' November 27, 2012 at 2:50 pm

I’m not sure you need to encourage smart behavior. You can just reward smart behavior.

I keep telling my wife we could borrow on the retirement. She sees this as “retirement!!!” Then I tell her, well, we invested more with the understanding that in a tight spot we could borrow against it. She says “IT’S RETIREMENT!!!”

26 msgkings November 27, 2012 at 2:52 pm

What is self-defeating about buying a house?

And the account will NOT have less in it because you are paying it back with interest, and the rate is set at some amount that approximates the return on your fixed income investment choices in the plan.

Sometimes you gotta admit you don’t understand something, john. None of us knows everything about everything.

27 john personna November 27, 2012 at 2:57 pm

To end up with the same balance you’d need to repay the loan and continue new contributions apace. I don’t think many, if any, manage that.

Now, you understand that nationally homes keep pace with inflation and do not beat it over the long term? Compare to long term SP 500.

28 msgkings November 27, 2012 at 3:02 pm

Now you’re turning the argument into ‘houses aren’t a good investment’, which may or may not be true but isn’t really relevant to the discussion on whether 401k savings plans and loans available on them are bad things or good things.

What’s wrong with just saying ‘ok maybe there’s another way to look at this one’? Or stopping digging your hole deeper?

And many do manage to pay back their loan to themselves and keep funding the account. And even if they didn’t, they’d be merely using the loan to borrow against their own savings. If they saved in some other bucket and needed to buy a house they’d just take it from there too.

29 john personna November 27, 2012 at 3:24 pm

This is where I’ve been all along, that 401(k)s are rife with unintended consequences. People being encouraged to tap them for the wrong reason is just one agency issue, one example.

30 Cliff November 27, 2012 at 8:15 pm

The major return on owning housing is not from appreciation, but not having to pay rent. Nowadays, many houses are good investments.

31 john personna November 28, 2012 at 8:14 am

Right, Cliff. But that implies that we should purchase sufficient shelter (in a good school district) rather than grand and luxurious showplaces. Over-investing in homes is IMO a wide problem. Better a smaller house and a healthy portfolio. The question on the table is whether 401(k)s should, or do, encourage that at all.

32 john personna November 27, 2012 at 1:56 pm

Note that this is not “1 in 5 have borrowed” and perhaps repaid. This is saying “1 in 5 have loans outstanding.”

33 Rich Berger November 27, 2012 at 2:07 pm

Caught you in a weak argument – wasn’t very hard. And yes, I did vote for Romney. He was far the better of the two realistic choices.

34 Andrew' November 27, 2012 at 2:43 pm

You primarily forego the potential investment returns.

You guys are getting your jokes crossed.

35 john perosnna November 28, 2012 at 8:19 am

Yes. Obama guy is arguing for economic efficiency and removal of government guided behavior. Romney guy is arguing for a heavy handed rule based system, because he thinks it implies a lower overall tax rate.

36 jimi November 28, 2012 at 10:48 pm

john, I gots your back, bro.

37 msgkings November 27, 2012 at 1:52 pm

#1 That photo is fantastic

#4 XKCD’s author deserves an Internet Nobel Prize

38 Slocum November 27, 2012 at 2:43 pm

“Exempting retirement investments from taxation increases the saver’s return on his investment…”

What return on investment!? Nah, at this point, the main advantage of a 401K is being able to pay retiree-level tax rates on the money when it is withdrawn rather than your highest marginal rate when it is deposited (which is the case for other forms of savings).

39 Andrew' November 27, 2012 at 2:57 pm

What I’d like is to be able to defer taxes to any time of life. It’s weird that we nail NFL running backs with the top bracket when they are likely to have zero income 2.5 years later.

40 Finch November 27, 2012 at 3:08 pm

If only being in the 1% wasn’t such a fleeting thing…

41 msgkings November 27, 2012 at 2:58 pm

I’ve had nice returns on my 401k investments, but then I have been using it for over 5 years.

42 Dick King November 27, 2012 at 9:28 pm

Actually, no. Te benefit is tax-deferred compounding.

Suppose you have 30 years to retire, and suppose you expect combined state and federal taxes to be 50% from now and through retirement. I know, that’s a bit high, but not so high if you live in California and more importantly it makes the arithmetic easy. Further suppose that you choose to buy CDs that pay 7.1%, and reinvest the interest. However, you only contribute 10K, once, this year.

Inside a 401K. Since the tax is deferred, the doubling time for your money is 10 years, so you have $80K pre-tax money at retirement, and you get to buy $40K of whatever you want.

Outside a 401K. The doubling time is 20 years, so you reach retirement with about $28K, after taxes.

Tax deferred accumulation is a big deal.


43 The Anti-Gnostic November 29, 2012 at 8:52 am

Further suppose that you choose to buy CDs that pay 7.1%

Please let me know where I can find these.

44 Willitts November 27, 2012 at 2:51 pm

4. The age-old fallacy that the tax base belongs to the government by default, and the only issue is how much of it they permit us to keep.

Evidence: the statement that this is burning a hole in the budget.

I wonder how politicians argued about the federal government budget when direct tax revenues weren’t available to them.

There are problems with the 401(k), and the pre-tax nature of contributions is not one of them. You could just as easily increase the marginal tax rate on everyone to raise $100 billion. This notion is just a redistribution from savers to non-savers or a back-door method to increase progressivity by reaching further down the income ladder – to all people with stable enough jobs to have 401(k)s. Removing the tax shield further reduces the ROR which is already precariously low, increasing the risk if superannuation and increased expenditures on social assistance to the elderly.

Cross country comparisons of behavior are always suspect because of different norms and institutions. If Denmark has a broader array of expenditures for the elderly, then removing the incentive to save might have little impact because the saving is not precautionary but rather consumption smoothing.

In the US, people save out of a very real perception that their future is not secured by social security and government finances. Removing the tax benefit could actually increase savings from a precautionary motive. Their dollars will be worth less, but they will have more of them later.

We already see tax flight to elderly friendly states. Why would anyone believe Americans would not respond to changes in incentives for savings.

That said, unlinking the pension fund from the employer and allowing employees to shop funds would be an improvement.

I deal mostly with high net worth clients who save quite a bit, and they are terrified of outliving their assets or not leaving a bequest. When the top 5% of income earners are scared about their financial future, there is a serious problem.

45 msgkings November 27, 2012 at 2:56 pm


46 Brandon Berg November 27, 2012 at 4:18 pm

The tax savings from 401(k)s are a drop in the bucket compared to the trillions of dollars the government is losing each year by allowing us to keep any of our own money at all.

47 mulp November 28, 2012 at 12:15 am

The tax revenue is not lost, merely deferred, unless your point is 401Ks do not work for 90% of the people who have them because the amount drawn in retirement is so small that no tax is triggered when combined with the low SS benefit.

But then too, the taxes saved on the tax deferred 401K must be low given the low SS benefit implying low earned income.

Or perhaps you are noting that the tax deferred savings in 401K is too often pillaged by fees and Wall Street pump and dump so less is drawn and taxed than was saved. How much income was flushed as tax deferred retirement savings in ENRON by employees suckered in that ponzi scheme.

48 mulp November 28, 2012 at 12:30 am

“In the US, people save out of a very real perception that their future is not secured by social security and government finances. ”

While I have heard many say the same time with even more passion, save one person, everyone I know who has really saved seriously for retirement did so because they knew Social Security and Medicare were not enough to avoid welfare.

And the policy researchers have collected disturbing evidence that in the three decades of doing all sorts of things to get alternative retirement savings to pensions and Social Security, Social Security and Medicare has become increasingly desperately needed by boomers, and boomer kids aren’t doing any better.

Meanwhile, US corporations have made an art out of creating huge work forces earning minimum wages for 30 hours a week who get by only by food stamps.

How many clients do you have earning $300 a week seeking retirement planning?

49 Brian Donohue November 27, 2012 at 3:47 pm

re #5 (Lucas):

“If we don’t accept the Quantity Theory of Money at low frequencies then I guess we should just close up shop.”

Anybody care to translate?

50 Ray Lopez November 28, 2012 at 2:05 am

Yes, I found the entire interview a bit confusing. Lucas claims no price stickiness as if it’s obvious. Then he claims this business recession is different yet states all business cycles are the same. I also thought (I could be wrong and I hope I am) that he was going senile–this was about 4 years ago, and I don’t think I’m confusing him with Dr. Case of the Case-Schiller index who does have a medical problem–but it could have just be a slur on Lucas. Apropos of nothing, it’s also one of the few times I’ve seen “RL” refer to somebody other than myself. Yes, I’m that vain.

51 TGGP November 28, 2012 at 11:28 pm

My interpretation: Lucas started out believing something along the lines of Friedman-Schwarz, all recessions are due to sticky prices combined with monetary shocks. Later the Real Business Cycle guys convinced him there are other “real” factors in play, so he (as he says rather explicitly at the end) he can no longer maintain that all recessions are alike.

52 Rich Berger November 28, 2012 at 9:58 am

I thought the possibilities were high frequency means high inflation or high velocity of money. That’s just a guess.

53 Brandon Berg November 27, 2012 at 4:16 pm

401(k)s and other IRAs give us a de facto consumption tax, at least for those whose savings do not exceed the cap. If anything should be eliminated, it’s the contribution cap.

54 All November 27, 2012 at 4:43 pm

Yes, all investments should be tax deferred. The purpose isn’t to encourage savings but to have a more fair consumption9(-like) tax than the income tax.

55 lords of lies November 27, 2012 at 6:31 pm

“The consequences of word nationalism for the OED.”

clearly, then, the solution is open binders for the OED — the entirety of the world’s words should be included in it. and it should be manufactured by desperate illegal migrants so as to be as cheap as the chalupas you love.

56 8 November 27, 2012 at 10:58 pm

Force employers to turn health insurance into cash wages. Let people decide how to spend the money. Wages+++ Government revenue+++ Broaden Tax Base+++ Healthcare costs plunge+++ It’s a quadfecta! Where’s my sinecure?

57 Floccina November 29, 2012 at 11:17 am

#4 The Fed. Gov. gets more than enough revenue but military spending is bloated as is Social Security spending. Medicare could also be cut.

58 ShaneM November 30, 2012 at 12:03 am

#4 401K: For what it’s worth, in my case tax exempt saving rules for 401K and IRA’s greatly impacts my propensity to save. In most years I put money into Roth IRAs just because I’m doing taxes and the deadline to do so is on me. Without the incentives of deferred taxation I’d also have far less tied up in traditional retirement accounts. Many years I just maxed out the 401K just because it seemed like the right thing to do. Without it there I don’t know where the money would’ve gone.

Like the previous poster mentioned – I think the effect may not be so much how much I’d save in retirement accounts given a change in tax rates – but more of a long term effect of how I’d save (or spend) in the absence of retirement accounts at all.

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