The Unfortunate War on 401(k)s

There are plenty of ways to play the redistribution game. One is to get rid of deductions for retirement savings, and Democrats are considering a plan to do just that.

What the presidential candidates say now is important, but it's Congress that ultimately shapes tax law. Voters should be listening not just to Barack Obama and John McCain, but also to Democrats who hold key positions in Congress — particularly in the House, which has sole power under the Constitution to originate revenue bills.

So what are powerful House Democrats thinking these days? For one thing, they're not happy with 401(k)s. Granted, no one who has 401(k) money in the stock market has much to be happy about. But it's not just the loss of investor wealth that has Democrats questioning these tax-advantaged retirement plans. They also dislike the plans' freedom of choice and the size of 401(k) tax deductions for higher-paid workers.

The so-called "tax subsidy" of 401(k) plans comes to $80 billion a year, and its biggest beneficiaries are employees in higher tax brackets. A worker making $35,000 and paying income tax in the 15% bracket gets a $525 break by setting aside 10% of pay in a 401(k). A worker making $150,000 and paying in the 28% bracket gets $4,200 from the same 10% deferral.

You can see why this irks the spread-the-wealth party. So it's no surprise that Democrats are intrigued by an alternative plan that would replace 401(k)s with a flat tax credit at all income levels.

Teresa Ghilarducci, an economist teaching at the New School for Social Research in New York, explained the plan at an Oct. 7 hearing before the House Education and Labor Committee, chaired by Rep. George Miller, D-Calif. Miller invited Ghilarducci in his quest to find a replacement for 401(k)s, which he has called "a big failure in terms of providing an adequate retirement for middle-class Americans."

Her proposal has also caught the eye of Rep. Jim McDermott, D-Wash., who chairs the House Ways and Means Committee's subcommittee on income security and child support. A McDermott spokesman calls the plan "intriguing."

Under Ghilarducci's plan, all workers would get a credit of $600 if they invest 5% of their pay into a retirement account run by the Social Security Administration and invested solely in special government bonds paying 3% plus inflation. Existing 401(k)s would be allowed to remain, but contributions and employer matches would no longer be tax-deductible. For want of an incentive, they would wither away.

This plan may have a short-term selling point in its risk-free bonds. Its participants would be in no danger of losing — or making — money in stocks. But a few months from now, the market may look quite a bit brighter and the public may not be so receptive to the idea of trading so much freedom for mediocre, if secure, returns.

Also, the Ghilarducci blueprint has been drawing hostile fire from skeptics on talk radio and elsewhere, so it may not survive the long march into law.

But the real issue here goes beyond any particular tax proposal. It's about motive and means. Leading Democrats share Barack Obama's penchant for redistribution, and they know that there are many routes toward that goal, some not so obvious. They also know how to play on fear — in this case, of stock market risk — as a way to sell ideas that might otherwise be unpalatable to most voters.

We just hope that voters can see past the current panic and recognize that the Democratic Party simply wants more of their money.