4/12/13 11:12 AM – Pres. Obama Wants to Cap Your Retirement Nest Egg

President Obama proposed today that no one should be able to have more in their tax-advantaged retirement accounts than what it would take to purchase an annuity paying $200K/year. Today, the savings needed to generate that is roughly $3 million. The government would apparently heavily tax your “excess savings.”

Gee, what could go wrong with that? Let me count the ways.

1) The cap would shrink with rising interest rates. With an annuity, the lower the interest rate, the more it takes to generate a certain level of income. As rates rise, the amount needed shrinks and so does the cap since it is based on an annuity.

How much would the cap shrink? Well, according to the Employee Benefits Research Institute quoted in the WSJ article on this today (Pg. A14), just in the last few years the cap could have been as low as $2.2 million.

Heck, that $2.2 figures would be due to interest rates just getting back close to normal. As the U.S. sinks ever deeper into debt and becomes a progressively poorer credit risk, the cap could easily be cut in half.

2) This policy punishes savers, those who sacrifice during their careers to fund a good retirement. Not only is this yet another instance of punishing those who do the right thing, but the feds desperately need savers because savings provide the funding for economic prosperity.

3) This would hurt the stock and bond markets if people cut back on savings. A worse bond market automatically raises interest rates and that slows down the economy by adding more interest expense for consumers and companies. A falling bond market always hurts the stock market, reducing the value of investments and eroding confidence in the economy, thereby again reducing economic growth.

4) This would probably raise little to no money for the government. The White House is assuming $9 billion in tax revenue. But, that assumes no one changes their behavior, not a good assumption since behavior could easily be changed in this case. People will either save less or put less of their savings into retirement accounts.

5) It would hurt Social Security. As people put less in retirement accounts, they must rely more on Social Security.

There is not a thing to like about this proposal. This is more of the president’s war on the well-off as he seeks to redistribute wealth, something he highlighted in the book he wrote before he was elected.

There is a lot to dislike. It definitely hurts savers; it reduces the incentive to provide for one’s own retirement, thus burdening Social Security; it probably hurts the markets and raises interest rates; it hurts the economy; and gains little to nothing for the federal government. I don’t know how a program could be designed any worse. Even the idea is a bad idea.

You ought to contact your representative in Washington and make sure they vote this down. It’s just another bad fix for problems Washington does not seem to understand.