It’s not much of a secret that the US government is in the midst of big financial problems. The annual structural government deficit is well in excess of $1 Trillion dollars, with no end in sight. In addition to this, there are a growing number of people who are hurtling toward retirement with insufficient assets to sustain themselves during their retirement years. Reports of people making early withdrawals from their retirement accounts have caused some to proclaim the 401k to be a failure, and have expressed a desire to replace the current 401k individual retirement accounts with a universal government sponsored pension.
Ordinarily, such a proposal would be dismissed as the pointless rants of folks from the far-left fringe. However, on October 7, 2010 Senator Tom Harkin (D-Iowa) held a recess hearing where he heard testimony from people advocating for a “Guaranteed Retirement Account” (GRA).
The fundamental feature of a GRA system is that the government would seize 401k accounts, set up an additional 5% payroll tax and distribute a “fair” pension to everybody. The line of reasoning that is used to advance the proposal among its proponents is that it replaces “market based” retirement plans with a government pension that is “more stable.” Of course, this is all a thinly veiled cover for confiscating multiple trillions of dollars in private wealth to bail out bankrupt government programs and union pension plans.
However, it provides a very important lesson to the people who have invested their time and effort into building a financial nest egg to fund their retirement. This message is that the government has already prepared proposals to come after large amounts of private wealth. When the government-entitlement state eventually comes to the point of collapse, the political establishment will become desperate. This creates a tremendous degree of risk for investors, since they may end up with a situation where their hard work to save and invest is literally stolen by the government and invested into government treasuries that pay a rate of interest below the rate of inflation.
In this way, there is a persistent risk that the once vaunted 401k could become a financial sink hole that devastates many millions of middle class investors just as they are nearing the age where they expected to retire. It is important for investors to understand the true nature and gravity of the situation. The US government does not currently have the power to confiscate your retirement assets, but that power could be granted by congress. From there, the bill would need to be signed by the President, and would almost certainly trigger a major court challenge. However, the proposals have already been advanced, and it seems to be only a matter of time before somebody in Washington DC becomes desperate enough to come after the private wealth of the millions who have invested their earnings into a 401k plan.
This demonstrates two fundamental truths. The first is that desperate governments will resort to highly risky and unethical measures to avoid the consequences of their collective fiscal irresponsibility. The second is that our financial resources may be at risk if they are concentrated in a place such as a 401k where they are easily visible by government agencies.
Now is not the time to incur a penalty and withdraw all of your funds from the 401k or IRA plan that you have established for your retirement assets. However, it is most certainly a time to pay diligent attention to what is happening in the financial and political landscape to determine when or if such actions will be required. Furthermore, now is a prime opportunity to begin diversifying your investing activities into areas that are not concentrated in highly visible pools of capital.
One highly effective vehicle for achieving this goal is income property. Since rental real estate is highly fragmented, it will be much more difficult and costly to confiscate than 401k and IRA assets. In this way, fragmentation serves as a defensive mechanism for investors. Another way that fragmentation works in the favor of income property investors is because laws regarding the landlord-renter relationship are all local. This means that a single sweeping change from Washington DC is unlikely to completely change the landscape of the income property market for the entire country.
Thus, the 401k carries an increasing risk of becoming a sink hole for investors. The government is running out of time before the full extent of their generational financial irresponsibility is brought to bear. The risk is not yet imminent, but is still very real. Intelligent investors should understand that the current world is one where the rules that were originally created to help people secure a happy, prosperous retirement are poised to be pulled out from under us at the most inopportune time possible.
Action Item: Diversify your investments into fragmented vehicles such as income properties that are not concentrated in large, highly visible financial institutions. This will help you defend against the risk of the government confiscating retirement accounts to fund a universal pension system.
The Jason Hartman Team
