Note: The November 11th conditional use hearing is postponed (likely postponed until January)
Scroll down for some additional information on the budget. (I had some ideas that may help us with the pension contribution (called MMO) going forward.)
I want to make you aware of important developments at the national level.
It seems the inevitable trouble of the federal social security system (with baby boomers retiring), combined with the efforts of many Americans to save for their own retirement with 401Ks and IRAs is giving our legislators some temptation. Teresa Ghilarducci, professor of economic policy analysis at the New School for Social Research in New York, has proposed to lawmakers that they confiscate your retirement savings,and in exchange give you a larger social security benefit (calculated as if you bought a 3% annuity)
I first read about this here:
http://www.carolinajournal.com/articles/display_story.html?id=5081
I was skeptical, and found the actual testimony here (pdf):
http://www.house.gov/ed_workforce/testimony/2008-10-07-TeresaGhilarducci.pdf
This whole thing reminds me of how FDR abrogated thousands of American's “gold clauses” in private contracts. Oklahoma’s Democratic Senator Thomas P. Gore asked Roosevelt, “Why, that’s just plain stealing, isn’t it, Mr. President?” Roosevelt saw to it that Gore was defeated in the next democratic primary.
I got to thinking how would Teresa Ghilarducci's planned theft be implemented without Americans cashing in their 401Ks and just paying the penalties (with a 3% compensation, you would be better off taking the 10% penalty) Ghilarducci's 3% annuity would not leave an inheritance for your kids. You would think that Americans would just pull out of 401Ks as soon as Ghilarducci's plan is seriously considered on the house floor.
The it occurred to me, you can prevent Americans from rescuing their 401Ks by increasing the top marginal income tax rate to the levels of the 1960s In the 1960s the top marginal rate was 70 – 77% in the 1950s it was as high as 87.2%. Today it is 35%.
So suppose a person making $60,000 managed to save $200,000 in his 401K. Suppose he wanted to save his $200,000 401K from Teresa Ghilarducci's theft. He could remove it and pay a 10% penalty ($20,000) His income for that year would be $260,000. Currently the 35% rate kicks in around $300,000 So our plunder avoiding American would avoid the 35% rate and likely pay about $52,000 extra in federal tax (assuming he's married filing jointly) So our hypothetical American saver pays $72,000 in tax and penalties to keep his now $128,000 (formerly $200,000) from the 3% annuity. Is that a good deal? That depends. If he can invest the $128,000 at 6.5%, it will take him 14 years to reach $290K. The 200K invested at 3% would reach $290K in 14 years as well. The 14 years does not include the effects of taxes on either amount. Teresa Ghilarducci wants all your 401K money to save social security. What to do to limit your options? Increase the top marginal rate back to the 77% of the 1960s and lower the level where it kicks in. This will be done to punish those greedy rich people, but it will totally trap all that middle class 401K money. The 3% annuity becomes the only reasonable course of action. The wealth is redistributed. Any residual 401K money that would have gone to your kids is swallowed by the abyss of social security.
I suspect that as social security nears its actuarial iceberg, Teresa Ghilarducci's planed theft of our 401Ks will become irresistible for the legislators. Look for the marginal rates to increase first, and know that Teresa Ghilarducci's plan is likely to follow.
More on the Maidencreek 2009 budget:
I am very concerned about the effect of the 2010 actuarial calculation on the Maidencreek pension. In the past we always just popped the pension contribution (MMO) into the investments in one lump sum once toward the end of the year. This year plopping one lump sum toward the end of the year worked to our advantage (due to the October drop) However, investment advisers usually say you can do better by making quarterly or monthly payments into a fund. That way you are automatically buying more shares low and less shares high. With the market swings of +/- 10% on any given day, plopping all of the 2009 MMO in one day may make us big winners or big losers. At this point it looks like we'll have about $170K in our emergency operating fund (EOF) at the end of the year. I think we should increase the 2009 MMO by $36,000 (or $2K per month) such that we have about $130K in the EOF for the close of 2009. By increasing the amount and paying monthly we will get more money invested at the average share prices for 2009 (which are hopefully lower than the average share price in 2010) Then when our actuary does the 2010 calculation, we may be in much better shape than if we had not done this. If as the year progresses, we see EIT or anything else deteriorating, we can change course and NOT make the additional MMO contribution, and just assure that we finish the year >= the original MMO. I do not see much harm in this method, and while it leaves the EOF a little lower at the end of 2009, it may make the 2010 actuarial numbers much better. I think the supervisors should give this consideration assuming the cash flow will allow it.
Free Book Offer:
Demand has caused me to order another case of books. I have copies of the Fredrick Bastiat book “The Law” available to Maidencreek residents. Email me if you want one.
Paid for by Roy Timpe