Yesterday, I linked Liz Peek’s column from The Fiscal Times pointing out that Barack Obama’s new budget has oddly stringent caps on tax-deferred savings in IRAs and 401Ks. Liz asked why Obama wants to punish savers. Today, Allen Sloan asks in the Washington Post why Obama wants twice as much in retirement benefits than the rest of Americans can build in tax-deferred savings, at least under the budget Obama proposes:
For starters, the point at which Obama wants to eliminate the ability of you and your employer to deduct contributions to your retirement account isn’t actually the $3.4 million in his budget proposal — that’s just an estimate. The real number is how much a couple age 62 would have to pay for an annuity that yields $205,000 a year. That $3.4 million — which applies to the combined values of your pension and retirement accounts — is subject to a sharp downward change in the future because annuity issuers charge significantly less for an annuity when interest rates are higher than they do today, with rates at rock-bottom levels.
I’ll grant you that $205,000 a year — the current IRS maximum for what a pension fund can pay a recipient — is serious money in many places. But it doesn’t buy you a rich retirement lifestyle in, say, New York’s Manhattan, where $205,000 is equivalent to $88,000 in Manhattan, Kans. The Manhattan-Manhattan distinction, from Money magazine’s cost-of-living calculator, is an example of the difference between being rich statistically and being rich in reality.
Second, I can’t get past Obama’s wanting to limit savers’ tax-favored accounts to only about half the value of what he stands to get from his post-presidential package. Based on numbers from Vanguard Annuity Access, I value his package at more than $6.6 million. (My calculations are at fortune.com/sloan.)
That’s right, $6.6 million. And that doesn’t include the IRA into which Obama has been socking away the $50,000-a-year maximum contribution, using money from his book royalties. Or the $18,000 (plus cost of living) a year he will get at age 62 for his service in the Illinois Senate, or any other benefits he or his wife may realize from past or future jobs.
Let’s revisit Liz’s column at this point to find out exactly how much Obama thinks he’ll get by capping everyone else’s tax-deferred savings:
The proposal is expected to save the government only $9 billion over the next 10 years – a drop in the budget bucket. This suggestion is not aimed at balancing our books, but at preventing the industrious from getting ahead. This, at a moment when it is clear that the nation should be promoting, and not discouraging savings, when Social Security looks likely to become another welfare program rather than a broad-based retirement account, and when the government boasts about reducing – not adding — red tape. And when, by the way, young people have been scorched by the financial crisis and are skittish about investing. Young people who live in a time that celebrates conspicuous consumption and not thrift.
The savings rate in our country fell to 2.6 percent in the first quarter of this year, the lowest rate since the end of 2007. This is not good news. Savings provide the capital we need for investment, as well as the monies that Americans need for retirement.
While President Obama was discouraging savings by high earners, he was including suggestions for a National Infrastructure Bank and “Fast Forward Bonds” aimed at leveraging private capital for repair of the nation’s outdated roads and airports.
Does anyone else see a contradiction here?
If we want to grow the economy, we want to encourage investment — especially the kind of long-term investment that IRAs and 401Ks provide. People seem to forget that these retirement plans were a fundamental reason for the massive expansion in capital during the 1980s. They unleashed American middle class wealth into capital markets, fueling the revolutionary growth of the stock market and creating a generation of prosperity. Prior to that period, the investor class in the US was about 15%; afterward, it was 70% or more.
Clearly, Obama has other priorities than growing the economy and encouraging long-term investment. He wants to expose more income to taxation and take even more capital out of the private markets, because at a certain point, you’ve made enough money. You have, anyway.