Monday, September 17, 2012

The 401k is a Government Subsidy for Wall Street

Wall Street apologists often try to defend Wall Street by pretending that it is somehow the last bastion of laissez-faire capitalism.  Even more comical, some wall street traders have even taken to call themselves defenders of free enterprise.  The truthais, the big bank bailouts in 2008 was the continuation of a long history of government sending our money to Wall Street.  There are several ways that the government subtly helps Wall Street fund it's addiction to speculation and stock market gambling.  One of the ways it does that is through the 401k tax provision.

It shouldn't surprise us that the 401K, marketed to us as a retirement plan, is just a cash cow for Wall Street. After all, the 401k started as a tax loophole for executive pay. So why do i call the retirement "plan" of millions a "Wall Street subsidy"? Well, let's see how it works.

A 401k retirement "account" allows one to make money on financial income without being taxed on it until later. For instance, if, one year, you put 100$ in your 401k, the income tax you would've paid on it is suspended.  Not until after you've retired and pull out that money will you pay income taxes on it - long after you've made interest, dividends, and other money with your untaxed money.

On top of that, your employer will get certain tax deductions and credits for setting up and directly contributing to an employee 401k plan.  When an employer sets up a 401k, a wall street firm will charge them a certain fee.  But lo and behold, the government gives the employer a tax credit to cover some or part of the fee.  This is essentially the federal government subsidizing 401k Management firms.  Funny how we hear the financial elite complain about healthcare subsidies, but not complain about this subsidy.

The worse part is the tax-free income of the 401k.  All money made in a 401k can get reinvested and doesn't get taxed until you want to spend it.  That might make sense for business taxes that pay only on profits, but not for personal taxes.  Personal income taxes, you pay on all income.  I don't get an exemption for investing in a car that can get me to my job faster, why do I get an exemption for buying Dow Chemical stock?

A 401k locks you into handing your money to Wall Street firms by specifying what you can't do with a 401k.  You can't use your 401k savings to invest in your friend's small business(You can take out a loan against your 401k, but still have to pay it back to wall street - with Interest!).  Unless that small business is listed on the New York stock exchange or some other stock exchange(that isn't a cheap(pdf) or easy task) and there is a mutual fund that invests in it(very unlikely).  Once Wall Street has your money via your 401k, they have it until you retire (unless you're willing to pay a huge fee, of course).

Some might think the answer is to boycott funding our 401ks.  Something akin to the Move Your Money campaign.  That campaign was trying to defund Wall Street by moving our money from the large commercial banks to local banks or credit unions.  But that won't work as well.  Moving to a local bank or credit union didn't involve losing much money.  In fact, it often means gaining money because credit unions often have better interest rates.  With a 401k, boycotting it means "leaving money on the table".

Because the government incentives employers to have as many employees to participate as possible, they offer matching funds(which are tax-deductible) that employees wouldn't get if they don't participate in the 401k.  If an individual employee doesn't participate he is losing money because of the government subsidies.

So what does this all amount to?  The federal government pays employers to setup 401k "retirement" funds that can only invest in financial assets that Wall Street firms control, pays employers to get as many people to participate as possible, and then gives employees tax breaks to go along with it.  The "defenders of free enterprise" are suspiciously quiet on this racket.

You might think I'm exaggerating the importance of the 401k in directing money to Wall Street.  So let's look at the numbers.  The 401k law went into effect in 1980.  In that year, the percentage of people who owned stock was 13%.  A slight dip from 15% in 1970.  By 1989, the number was 32% - More than double 9 years earlier.  By 1998 over half of the country owned stock(source for numbers here).  There is significant financial wealth to be had with 401ks.  Nearly 3 trillion dollars worth.  That is a lot of money to be sloshing around in Wall Street's computer banks.  As you can imagine that 3 trillion dollars means a lot fees for managing all that wealth.

I have no problem with people entering the wall street casino willingly.  But now we incentivise people to enter it.  Requiring people to enter it to make sure they get all the tax breaks they wouldn't receive otherwise.  This requirement means that people who are not qualified to manage their own investments are forced into it.  The power elite know this.

I used to ask the CEO, CFO of my major clients, ... often in a conference room [after] some young employee would bring in coffee, and as they would be leaving, I would ask the CEO, "Would you allow that employee to direct the investment of your account in the 401(k) plan?" They always thought I was some kind of idiot: "Of course not. I wouldn't let them touch my account with a 10-foot pole." And I said, "But you force them to manage their own!" And they are running their money into the ground.
The irony here is dripping.  First, we are assumed to be too stupid to properly save for our retirement, so we have to have tax breaks that incentivize us to give money to Wall Street to save for retirement.  But once we make the decision to hand our money over, then suddenly we are magically smart enough to manage our own stock portfolio.  As you can imagine, most aren't educated nor have enough time to make informed decisions.  This disparity reflects poorly on those who most need a retirement plan.  Only the highest educated and most familiar regularly beat the system and maximize their gains.

I think what should happen is that this 401k tax loop-hole should be closed and in exchange we all get a general income tax cut(starting at the bottom bracket).  If we are all taxed less on our work and labor, we will have more money to save.  Then we can all decide on how best to save for retirement beyond Social Security.  Some might still enter the wall street casino that are knowledgeable enough, others might choose other routes like paying off mortgages early, or others still might try to build a small business.

The point is, we shouldn't let Wall Street use the tax code to force us all into the same option.  That would be a real "free market" principle.  You would think all those big bankers would be all for that.  Unfortunately, they rarely speak up when a free market principle would actually take away one of their cash cows.  People like Peter Schiff will go in front of congress and demand eliminating the minimum wage, unemployment benefits, and anti-discrimination laws, but not once has he ever suggested eliminating the 401k or any of the other canards that direct money to investment firms like the one he owns.  So much for our "defenders of free enterprise".
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