Is our government plotting to rob 401(k)s?

In 2008, Argentina seized $29 billion of its citizens' private retirement funds. Why? Because, as MoneyWeek explained, “the country has more public debt than when it defaulted seven years ago. That’s why the private pension accounts are being seized; the government needs the money.”

The government apparently cashed out the private investments and used the cash, giving citizens IOUs (with the fancy name of “government securities”). Even if the government ever pays back its debt, that debt is rapidly losing value because Argentina suffered the world’s third-highest inflation rate in 2009.

To sum up: The government grabbed private pensions, sold them off, spent the cash, and replaced the accounts with IOUs which are rapidly becoming worthless because the government is printing so much currency that the currency is rapidly losing value.

I explain all this because some believe the U.S. government might be planning the same thing since U.S. government debt is exploding and traditional lenders — most notably, China — are balking at buying more:

The [government plan] involves rolling people’s 401(k) savings into directed distribution plans unless they specifically elect not to participate… Congress reformed the 401(k) system three years ago. The idea back then was the exact opposite of the current proposal… [T]hat the concept of reforming the 401(k) system has shifted 180 degrees in just three years, from moving people into high-yield, riskier investments to moving people into low-yield, relatively safer investments, should be all the reason you need to become suspicious.

When the 401(k) system was being reformed in the spring of 2007 the stock market had been on a four year bull market. Stocks were getting very expensive and overpriced. Wall Street insiders, which were holding these stocks needed someone to sell them to before the stock market began declining just six months later.

In this environment, Congress “magically” decided that 401(k) holders needed to buy more stocks, and Wall Street obliged. The 401(k) holders would have been much better off if they had instead been in money market funds, like they wanted to be, but that’s not what the reformers in Congress decided. What happened instead was Wall Street insiders unloaded much of their overpriced stocks on 401(k) sheeple before the market crashed.

Today’s market is very different. Interest rates are at historic lows, thus bond prices are at historic highs. The government is flooding the market with record treasury issuance and mortgage-backed security yields are only being kept down by massive intervention by the Federal Reserve. Interest rates have nowhere to go but up, which means that bond prices have nowhere to go but down.

Now Congress wants to reform the 401(k) system again, this time getting people to invest in fixed-income financial products, and Wall Street is sure to oblige again. Even Secretary Iwry’s proposal admits that these lifetime income products are “inflexible and expensive” with annuity fees averaging around 6% annually, as opposed to the 3% annual fees from a 401(k).

If this comes to pass in America, it would be even more disgusting than in Argentina. At least in Argentina the motive was to prop up government finances and prevent the chaos of government default. In America, the prime motive would be private greed. Banks would make a killing selling overvalued bonds to these new government-administered retirement accounts before government cranked up the printing presses and inflation kicked in, slashing the real value of government debt and government-administered accounts. If this comes to pass, the government and banks would have, in effect, stolen part of each 401(k).

I’d like to believe this could never happen here, but it fits two Washington SOPs: 1) Screw the ignorant: The plan being floated would allow the well-informed to opt out; and, 2) Banks matter; ordinary people don’t: Megabanks have recently received tens of trillions of dollars while the nearly 300 million ordinary Americans received nothing but massive future tax hikes to pay for those bailouts.

Posted by James on Tuesday, January 12, 2010