Friday, December 7, 2012

GRA Should Be Declared DOA

It’s often said that the nine most frightening words in the English language are “I’m from the government and I’m here to help.”

World-renowned  economist Milton Friedman once joked that you could take any three letters from the alphabet, scramble them in any order, and you'll end up with an acronym for a federal agency we could absolutely do without.

Throughout my former incarnation as a journalist to my present day capacity in the consulting sector, I’ve taken more than one occasion to chronicle the federal government’s inability to run, well, anything. As a poster child for a case against government control, I hold up the U.S. Post Office, which is rapidly careening toward a loss of $16 billion this fiscal year and entertaining the prospect of shuttering hundreds of locations as well as eliminating Saturday delivery.

But lately there’s been a lot of talk and media buzz about Government Retirement Accounts, a proposal that would call for workers not currently enrolled in a 401(k) equivalent or defined benefit plan to enroll in a GRA – whereupon the workers would accumulate savings in investment funds that earn a guaranteed 3 percent return.

It’s not a new proposal. In reality, it’s been around for nearly five years and is the – ahem – brainchild of one Teresa Ghilarducci, a labor economist and the chair of economic policy analysis who directs the Schwartz Center at New York’s New School of Social Research.

I first wrote about this nightmare-in-waiting several years ago following a hearing before a Senate Labor and Pensions Committee. In the Ciff Notes version, the government mandates that you would be again, ahem, “persuaded” to loan roughly 5% of your income to the GRAs. These funds will be converted to life annuities upon retirement. Along with Social Security benefits, these will replace approximately 70% of pre-retirement earnings for the typical retiree. Tax breaks for 401(k)-style plans and IRAs will be converted into flat tax credits to offset the cost of these new accounts.

The GRAs would be administered by the Social Security Administration.  And if that doesn’t send up a warning flare, then nothing will.

But, as they say, now for the rest of the story.

The return for the GRA is 3%.

By contrast, the long-run return of the stock market, adjusted for inflation, hovers around 7%. If, for example, you enroll in a GRA at 25 and you have lump sum of $40,000 growing at 3% per year, in 40 years, you will have $130,481.51. Conversely, had you invested in the stock market, pending a 7% return for the same 40-year span, your principle would be just shy of $599,000.

Considering the federal government's track record in financial matters, I'll take my chances with the market.

One also has to take into consideration that any traction this plan has heretofore received when it first surfaced came in 2008-2009, a period when 401(k) plans were plummeting at the heart of the financial crisis. When one’s life savings are melting faster than dry ice in Arizona, rational behavior or thinking tends to take a back seat.

One of the most disturbing facets of the GRA  entails vested ownership. Once an employee is vested, he or she owns 100% of the 401(k). Should that employee die, the designated heirs receive 100% of the money. Under the GRA proposal, the deceased's family would receive just 50%, with the rest circulated back to Uncle Sam.

Also, one may want to consider the  inevitable fallout in the financial markets when trillions are withdrawn from those 401(k) plans and redirected to the government.

It's going to be difficult enough having to navigate the pending behemoth  of  universal health care. I can only imagine the debacle  of  universal retirement. One analyst at the time of its unveiling termed the GRA “a sibling Ponzi scheme working in tandem with Social Security.”
You can draw your own conclusions.

The only acronym this proposal should be assigned is DOA.

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