A genuine, non-sarcastic, authentic “hurrah” to this Tweeted statement from President Trump: “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!”
There are three main ways that Americans can save money for retirement. The first is an individual retirement account (IRA), where the money is not taxed when you deposit it or as it grows in value, but you pay income taxes when you withdraw it after retiring. The second is a Roth IRA, where you pay income tax on the money when you put it in, but don’t pay taxes on withdrawals when you retire. The third is the 401(k), which operates like a traditional IRA but your employer offers a matching contribution up to a certain percentage of your salary. Many financial planners will advise you to contribute as much as you can afford to your 401(k), or at least to the matching limit, because if you don’t, you’re effectively turning down free money for retirement from your employer.
The 401(k) account is an incentive for Americans to save for the future and not rely on the government to support them in their golden years. It promotes thrift, long-term planning, and deferred gratification. It adds millions of non-wealthy Americans to the “investor class.” As one financial firm put it, “Uncle Sam doesn’t offer many gifts. This is one. The upside: free money.”
The New York Times reported Friday that House Republicans were considering a plan to sharply reduce the amount of income American workers can save in tax-deferred retirement accounts as part of a broad effort to rewrite the tax code. Right now, you can put up to $18,000 in 401(k) accounts and not pay taxes on that money, $24,000 if you’re over age 50. (The IRS recently announced that the limit will go up to $18,500 next year.)
The Times article reported that one of the ideas under consideration was reducing the annual amount workers can set aside to as low as $2,400. Eliminating the tax break for 401(k)s entirely in 2018 would generate $115 billion in new revenue. Our Andrew Stuttaford rightly labeled this idea “idiocy” and it’s such a bad idea, it’s fair to wonder just how seriously this idea was considered. It’s usually voices on the left that want to eliminate the tax incentives for saving money.
Way back in October 2008, as the financial crisis raged, House Democrats held hearings that contemplated eliminating the tax breaks, hearing a proposal from New School economist Teresa Ghilarducci:
Still, as she sat at the witness table on Oct. 7 at a hearing of the House Committee on Education and Labor, running through the litany of what’s wrong with the 401(k) and other defined-contribution retirement plans — they have high fees, for one — Ghilarducci didn’t think she was courting controversy. “I was saying things that seemed completely milquetoast,” she recalls. Ghilarducci did bring up a bold proposal to replace the 401(k) with a mandatory, government-run pension plan and suggested that Congress immediately allow retirees to swap 401(k)s battered by the stock market’s collapse for monthly payouts from the government. But she had floated both ideas before, to little effect.
President Obama was pretty pro-IRA as far as Democratic presidents go. Back on the campaign trail in 2008, he said he wanted to require employers who do not offer retirement plans to offer their workers access to automatic IRAs and contribute via payroll deduction. Given a choice between mandating employers create IRAs and mandating they provide health insurance, I would have chosen the former. Unfortunately, Obama prioritized the latter, and after Obamacare, neither a Democrat nor Republican-run Congress was willing to force employers to provide another benefit to all employees.
Later in his presidency, Obama shifted to the “MyRA,” a nice enough idea that never really worked. The idea was a “no-fee, no-minimum-investment version of a Roth individual retirement account,” allowing up to $5,500 per year invested in government bonds.
Unfortunately, the idea flopped:
Running the entire program through the federal government, the Obama administration spent $70 million and only got 20,000 Americans to invest — an outrageous cost of $3,500 for each new account. Of that, $10 million went to a single bank — Comerica — to act as custodian for this small number of simple, non-trading accounts.
But President Obama had worse ideas. Back in 2013, he proposed eliminating certain tax advantages on IRAs and other tax-preferred retirement accounts when funds exceed a certain threshold. The threshold was pretty high — $3 million or so — but once again, Congress saw little appetite for punishing people who had saved a lot of money for retirement.
The Obama administration also flirted with the idea of taxing 529 college savings accounts.
What kind of tax hit might that have added up to for families who are just about to start 529 accounts themselves? I asked Vanguard to run some numbers. Parents who deposited $5,000 a year over 18 years and got a 6 percent return each year on their money would eventually end up with $179,140.48 that they could draw on during college.
That’s a lot of tax-free growth, so it’s only natural that it might have become a target. A family in the 25 percent tax bracket would have paid $22,285.12 in income taxes on that growth under the president’s plan if they withdrew it over four years, according to Vanguard. A household earning enough to be in the 35 percent tax bracket would have paid $31,199.17.
The administration abandoned that plan after a week of scathing press coverage.
Eliminating the tax benefits for 401(k)s and retirement savings was a terrible idea when Democrats proposed it, and reducing the tax benefits is an almost as equally terrible idea from Republicans.
Killing Network Reputations
Is there a strong counter-argument to David French’s call for Bill O’Reilly to be “Weinsteined” and “banished from every serious and meaningful conservative outlet just as Weinstein is being stripped of his progressive public platforms”?
(Let’s point out, the jury is still out on whether Harvey Weinstein will really be “Weinsteined” himself. Yes, he’s a pariah in the movie industry now, but what happens when some star desperately wants funding for his passion project, and Harvey Weinstein is knocking at the door with a giant pile of cash? If almost everyone in the industry knew and largely did nothing of consequence, it’s far from a given that everyone in the industry will turn their backs on Weinstein in perpetuity. Weinstein could easily turn into another Woody Allen or Roman Polanski – a figure who is controversial, but not so controversial that big stars and other talent refuse to work with him.)
We’re left wondering just what you have to do to get a company like Fox News to agree to pay out an astonishing $32 million in a settlement. The New York Times article that revealed the settlement mentions “allegations of repeated harassment, a nonconsensual sexual relationship and the sending of gay pornography and other sexually explicit material to her.” The words “nonconsensual sexual relationship” feel like painful corporate jargon designed to obscure.
O’Reilly told the newspaper, “I never mistreated anyone,” but that doesn’t sound plausible. Yes, companies settle nuisance suits, but they don’t pay out $32 million. As one of the Popehat contributors observed, the largest personal injury settlement in New York history was $22 million, paid to a woman who was hit by a bus and “suffered brain damage, blindness and can hardly speak.” Just what did O’Reilly do that made Fox News conclude that paying $10 million more than the largest injury settlement in state history was the better course of action? And how did that action not get him fired?
Imagine costing your employer $45 million in six separate settlements over claims of sexual harassment . . . and they’re still renewing your contract. Heck, even after O’Reilly was forced to step down, Fox News let him appear on Sean Hannity’s program in September.
If you’re wondering who received the previously-known largest settlement with a company over sexual harassment, that would be Gretchen Carlson, the former Fox News anchor who sued Fox News for sexual harassment, claiming her contract was not renewed because she wouldn’t return Roger Ailes’ advances. Fox News settled with her for $20 million.
“I think it’s horrifying and outrageous that any company, after dismissing somebody for allegations such as that,” would “allow that person to come back on the air,” Carlson said.
On CNN, Carlson declared, “This is covering up, this is enablers, this is shutting up the victims. And I think it’s absolutely horrifying that we’ve allowed this to go on for so long in our corporate culture.” What’s really sad is that you can apply that moral indictment to Fox News or The Weinstein Company.
O’Reilly also told the Times, “It’s politically and financially motivated.” Does anything enable a man more than “enemies” he can blame?
ADDENDA: A fun question from Ben Domenech: What’s the conspiracy theory you deep down think might be true?
I suggested that Marilyn Monroe may have become too inconvenient for the Kennedys. Yes, this puts me on the same page as one of my fictional characters.