Saturday, April 3, 2010

Treasury Grab of Retirement Assets, Personal Consequences

I have been thinking more about the consequences of the Treasury’s grab of retirement assets. It is what the Treasury is calling the issue of providing a “Lifetime Income Option in Retirement Plans”.



The idea is that they will take control of assets in defined contribution retirement plans, probably only 401(k) plans because those show the largest accumulations. The owners of the retirement accounts would then receive a government issued annuity backed by Treasury Bonds, i.e., the interest paid on Treasury Bonds will be used to fund the annuities and provide for the periodic payment to the retiree when he retires. There are a lot of details that are uncertain. For example, I have seen the suggestion that accounts under $250,000 are too small and won’t be touched.


Right off, there are several problems, not only for the retiree but all of us. In this post I am not considering the unparalleled damage done to the economy by removing such a huge pool of savings from private hands. Nor am I including the additional amazing damage to the rights and concept of property that seizing retirement accounts would entail. (a good blog on these points, see Bokor) My focus for this article is on the financial consequences that are more immediate.


It is somewhat difficult to predict exactly what is going to happen because none of the details are available, and may not be until the Treasury begins moving retirement accounts into the annuities. The following is clear. At some point the government will begin seizing accounts. It may seize only the accounts of retirees and those it deems close to retirement. It is unknown if they’ll seize more. But it will at least seize those and issue annuities for at least those who are retired. This may not be for just the newly retired, but anyone who is retired and has an account large enough to be attractive to seize. Since the reason for seizing retirement accounts is to use the money for government purposes, it will convert the assets to cash to buy government bonds, probably a newly created special class. The government will sell the securities in the seized retirement accounts.


This point is absolutely necessary to understand: The government will be selling the seized securities.


Since it will be selling at least the securities of the retired and the soon to be retired, we can count on those securities entering the market. What will happen when these securities hit the market? Who will buy them? Where is the money going to come from to soak up all of the securities being offered? Remember, the government is beginning to soak up funds for the massive amount of new Bonds due to BO’s deficits. The Fed may try to pump in the money, but it will take maybe up to a trillion dollars to cover the securities being offered by the Treasury, if they only offer amount for retirees and the soon to be retired. Even the Fed would be wary to begin pumping that much money. The Fed is currently trying to find a way to remove nearly $1T from the economy without letting interest rates rise.


Further, as people realize what is going to happen, there will already be selling. The market will have dropped significantly already by the time the Treasury begins selling the newly seized retirement accounts.


What is going to happen is that the markets for stocks and possibly bonds will both tank (and interest rates will skyrocket). With the amount of selling pressure that the Treasury will exert upon the markets, the stock market will see drops beyond anything in its history.


Generally, I am not an alarmist. I am not one of those who have expected the stock market to dive at various points in over the last forty years. I didn’t take Harry Browne or Peter Schiff particularly seriously. So my thoughts here are not the conclusions that I reach in most circumstances. I am saying that I am very concerned about the consequences of this particular potential action by the government.


The drop in the stock market in the recent panic occurred because it was a panic. The media began pushing the idea that our economy was failing months before real signs could be seen. The government didn’t really react one way or another at that time (I mean in terms of immediate actions that pushed the market lower.). Much of the dive was panic and fear, and not due to immediate economic factors.


The stock market dive in 1929 had much to do with the attempts of the Fed to stop price inflation by sharply reigning in the money supply (see Economics and the Public Welfare by Benjamin Anderson). Then the panic was due to government caused economic factors.


The panic and dive of the stock market as a result of the seizing of retirement accounts will be due to massive selling pressure from the government trying to raise money by selling stolen securities. It will be very obvious. Even if they try to do it in a phased manner, e.g., over the course of a year, it will be steady and relentless. And since everyone will know what is going on, there will be few buyers.


Let me compare the potential situation with another scenario. There are some commentators who suggest that as the baby-boomers retire, they will be selling off their retirement assets causing the market to decline. It might be suggested that there is little difference between the government doing it and the actions of the retirees. I suppose that there are some retirees who will sell all of the stocks on retirement day and buy bonds to have an income in retirement. It would be a bad idea, but there are many bad ideas floating around out there being used to “guide” people in their personal financial decisions. The difference here is that the government is going to seize all of the assets of this group and sell them off comprehensively. For the two to be similar, all of the baby-boomers retiring that year would have to sell all of their stocks without regard to current market conditions. I am expecting the Treasury to ignore current market conditions because they have the requirement to come up with the money. There certainly will be some heat, at some time, but will it be soon enough, loud enough, and principled enough to stop it? The Treasury won’t stop before the markets come down. They may later, but there will already have been much damage.


One factor in the Treasury’s “thinking” that should not be forgotten is that their justification for seizing retirement assets and issuing annuities is for the benefit of the retiree. The Treasury is doing a good thing for those poor, innocent, clueless old people. The rationalization will see the Treasury through any disaster that occurs. It won’t be their fault, but the market, capitalism.


You might think that the extreme drop in the equity markets would be a good buying opportunity. It isn’t. This sell off is planned to be a continuous thing, because the Treasury is aiming at all of the retirement assets of everyone (at least over a certain size of account). It will need the following years of stolen securities even more because the people at the Treasury will not be expecting the drop in market value that will occur. As every politician in history has planned on things not changing when they enact their plan to extract money from the economy, the Treasury and its supporter will not expect the market drop, so their plans on what to do with the money will be thwarted and they will need more. Lots more. If there is any economy left after all that BO has planned for us, the markets will only begin to recover when the retirement plan windfall dries up and the government has no more to sell. That is, the market will recover if the government hasn’t taken all other assets as well.


The bond market may react a little differently. Many of these retirement accounts have significant government bonds, which the Treasury might just hold as is. Depending upon when this occurs, since BO’s deficits already requires expanded bond sales, interest rates may already be higher and the Treasury may not want to put more bonds on the market. Some of the money that came out of the stock market before the Treasury begins selling the stolen securities may have gone into the bond market, especially if the interest rate had begun to rise. There are too many variables, including the foreign Treasury Bond investors. How the foreigners will react, and how the dollar will be affected will take much consideration. Certainly a sell off of our stock market will not be considered a good thing for the dollar. It should drop.


For the retirees and the others that had their assets seized by the government the situation will be dire. They may have said to themselves that at least they would get an annuity equal to their retirement account. But instead, they will get what the government received for their assets as the market fell. Don’t expect the government to keep tabs on whose account held what. Expect that the original owners of the retirement accounts will be treated very badly. Explicitly, the original owners of the seized retirement accounts could receive $0.50 on the dollar, $0.35 on the dollar, $0.10 on the dollar. Who knows? We can count on these victims to end up with a government annuity worth much less than their original retirement account, that it will not payout a significant percentage, and since the government may go broke, that it may not last as long as needed (if our failing health care system doesn’t do them in first). If what the government provides is a standard annuity, the income will be fixed, and all of the retirees will be left defenseless to the continuing price inflation. Given the potentials for rising price inflation in the next several years, the retirees could experience severe hardship.


What should you do? Right off, regardless of your age, when you see that the government is going to be able to get its hands on retirement assets, stop contributing to your retirement plan. Stop! Get your friends and relatives and colleges and everyone to stop contributing. Save your money from being taken. Next, to the extent you can, withdraw your assets from all retirement accounts. Yes, there is a tax penalty. For anyone over the age of 59½ it will be a straight shot of income tax. For those younger, it will include a 10% penalty for early withdrawal. You have to do the math, but to leave the money in the retirement accounts is to subject yourself to the risk of the government seizing it.


Don’t put any money into the markets. Keep cash. Sell what securities you own in any taxable accounts that you can. I expect many more will be doing the same, so try to be the first. The market is going to go down and down, even before the Treasury starts liquidating the retirement accounts it has seized. Some cash from those sales is better than less. Liquidate. You might try foreign investments. You might try commodities. You might try monetary metals. You might try foreign cash. As people flee the Treasury’s asset grab and the equity market, the government may attempt to put in place controls to achieve its purpose of seizing assets. If so, many of these avenues may be closed off. Again, keep up to date on news and make cautious decisions.


What we can do now is to express our opposition to the Treasury’s plan. We also have to keep a careful watch on the progress of their plan and, if it gets approved, its implementation.

8 comments:

  1. > "We also have to keep a careful watch on the progress of their plan ..."

    Where is the proof that there is a "plan" to seize retirement assets?

    Your readers might like to know:

    1. Here is a link to an earlier article in Krazy Economy. See the "Grab ..." subsection at the end:

    http://krazyeconomy.blogspot.com/2010/03/my-return-four-comments.html

    2. Here is a link, from the article above, which leads to an article in Investment News, at the end of which is a link ("here") to the government document in question.
    http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20100302/REG/100229880/-1/INRegulatoryAlert03

    3. And here is the government document calling for input:
    http://www.dol.gov/federalregister/HtmlDisplay.aspx?DocId=23512&AgencyId=8

    Nowhere in this do I see proof of a plan or even a movement toward seizure. What have I missed?

    I don't doubt that there are statists in the USA who would love to enact such a seizure. I don't see evidence that there is a plan or even a movement toward seizure. Premature selling of investment assets could be a disaster.

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  2. C. W., I want to thank you for raising the alert about this and suggesting a possible course of action, if the worst is about to happen.

    You, and others, are right to be on the lookout for such threats. I have been an investor for 40 years and I have heard many scare stories about statist plans to further degrade property rights. Most of those stories never came to fruition. I know people who lost a lot of money moving ahead of the facts.

    That is why I am raising a challenge to the idea of a plan to seize retirement accounts, even if only in some forms.

    Thank you for the "stimulus"!

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  3. Burgess, I do emphatically agree with your caution. I hope that I sufficiently emphasized that one should not do anything now regarding this issue, except to keep one's eyes open. (That is in distinction to the self-defense investment steps one should be taking regarding the deficit and actions by the Fed.)

    Your questions made me realized that I have a perspective on the Treasury's request for comment that I haven't seen elsewhere. This perspective comes from my own history as an interested observer and my time in the financial services industry. I am working on a post to provide some basis for accepting the idea that the Treasury wants our money any way it can get it.

    Thank you for all of both comments, Burgess.

    C.W.

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  4. Retirement can signify a lot of things to a lot of people; sailing off into the sunset with your beloved; never having to worry about waking up early to catch the morning train; fingerpainting with your grandkids.

    But to make these dreams a reality, you'll need to create a nest egg that will make your retirement years as comfortable, if not more, as when you were working.

    Thanks for the posting...

    Lump Sum Annuity

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  5. C.W. Thanks for this post. A question: we have been thinking of rolling a sizeable 401K into a self-directed account in order to invest in real property (a ranch) to ride out what is happening to our economy. True the ranch must be worked, but we learned the truth of "Baby, We Can NEVER Retire" in 2008. But if they are going to seize the 401K, will they be able to or interested in seizing the land? Or somehow pulling the investment away from us--rendering us destitute?


    We have a year until my husband is 59.5 and we are trying to not pay the penalties or even the taxes.

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  6. Elisheva,

    First, the reality of the government seizing the 401(k) is still in doubt and definitely in the future. It is something to keep an eye on, but not to base one’s plans on as yet. The initial plan would be an initiate aimed at employer qualified plans. Generally, my preference has always been to move your retirement savings to an IRA and out of the 401(k) when possible. If you can do that, do it. So far, the focus of the Treasury and Labor Dept. has been on employer plans. To get to IRA’s, the administration will have to approach the subject with a much wider argument.

    More of an immediate concern than the potential seizure of 401(k) plans would be the state of the economy and BO’s plans. His interference and the Fed manipulations make normal investor activity open to very adverse conditions. Having some plan as you are suggesting might be a good possibility.

    Having no idea of your situation, my first concerns are centered about the specific object of your plan. Do you know real estate and the area of the ranch? Do you know how to run a ranch profitably, or at least enough to sustain yourselves? Without real experience and knowledge about those issues, investing there would be an unacceptable risk.

    Even beyond that I have lots of questions about owning a ranch within an IRA format. I know that the law says that you can purchase real estate within an IRA, but that leaves lots of questions. If you haven’t done the due diligence, don’t make a move until you know all of the details. For example, can you purchase with a mortgage? Are banks willing to loan to an IRA on real estate (may depend upon state law). How do you run the business with this situation? You will want to explore the various options, such as, renting from your own IRA. Do you need to be a corporation or a partnership? (And what happens to the entire thing if you two split?) I have many more questions than answers. You need adequate legal assistance.

    Good luck. What ever you do, the nest few years may be bumpy.

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  7. CW--Thanks. We're not city folks. We've got the legal advice (tax attorney) and we are working on the business plan for the ranch, and we both have experience that will let us run certain aspects of the business. So we're up to speed there. This is a dream we have been thinking about for some time and we will be funding the business capitalization with other money. We will not get a mortgage--in fact, we're buying the land cash through the 401K (it is a sizeable account--my husband was an engineer with no one but himself to worry about until we married 10 years ago)which will be rolled over to a self-directed IRA and invested in the property that way. This is all possible.

    Break up? I suppose anything is possible, but that's unlikely.

    The reason we thought to do this and began planning for it soon after our marriage is that even before BO we saw what was coming. My diligence saved us some money in 2008, though we lost big on other accounts. Now my husband believes me when I tell him we need to get out of the markets.

    The ranch will make it possible for us to sustain ourselves, and help some family members through the coming hard times. Plus we will be far from the city--where people are pretty dependent on much of the infrastructure that our crazy politicians want to destroy, and we have chosen an obscure county where the sheriff--and anyone likely to be elected sheriff--understands his Constitutional resposibility to protect the rights of the citizens against the Feds if necessary.

    We were already in the process of buying when you posted this article on Objectivist Roundup, but we wanted to check out the possibility that they'd try to take the land out from under us.

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  8. Oh--we will be running the company (an LLC-taxed as an S-corp) and the business will lease the land from the IRA. We will be living on adjacent parcel purchased with non-qualified money. I'll let you know how it goes, if you want, because it might be instructive for some of your readers who are like-minded.

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