Thursday, September 07, 2006

Mostly Rhetorical Question In Lieu of the Post I Don't Have Time to Write (Bad Center-Right Policy Edition)

by Tom Bozzo

Is there any serious reason why I shouldn't view the Roth 401(k) as:
  1. An estate tax avoidance scheme (assuming Congress fails at permanent repeal of the tax) for the very rich;
  2. An unnecessary additional tax subsidy for retirement savings that the moderately well-to-do already would have squirreled away in the non-Roth world;
  3. Somewhere between a poor deal and an unnecessary contributor to retirement-planning confusion for everyone else (the vast majority).
  1. Despite his legislative efforts to increase the general fund deficit, the late Sen. Roth would be considered part of the moderate, country-club wing of the Republican party by modern standards.
  2. Other things equal, increasing the general fund deficit is not a very good idea. Increasing future general fund deficits when baby boomers are known to be coming into a position to redeem the Greenspan forced savings account (a/k/a the Social Security trust fund) is an especially bad idea.
  3. The Roth retirement accounts are extensively marketed based on tax scenarios that are in fantasyland for most defined contribution account holders — i.e., occupying income tax brackets for very high earners in both the working and retirement years.
  4. While Stephen Rose is correct, in the sense that he's citing Survey of Consumer Finances statistics, that 55-64-year-olds have a median net worth just short of $250,000, a political axe to grind prevents him from recognizing that the same data show financial assets to constitute a relatively small fraction of that net worth: $78,000 for all financial asset categories.
  5. Especially with the pension system heading where it's going, a retiree with $78,000 in financial assets probably doesn't have to worry about being in a high tax bracket — the income thrown off by assets of that magnitude will cover that Medicare Part D donut hole and not a whole lot more.
(Guess I had a little more time than I thought.)
I think you covered it. The only people with the elasticity to invest in a Roth 401(k) are those who don't need it.

401(k)s are a bad enough idea as is for all parties. (The government loses tax revenues; losses in the 401(k) are not deductible. That it's the only game in town doesn't mean it's not rigged.)
I am a few days late for this conversation but I had to add a point of agreement and one of disagreement.

The Roth is an elitist option for the most part. The Roth 401k and all of the 2010 conversions will make matters worse. Only the upper crust will be able to afford the conversions and, afterwards, they won't even have capital gains taxes on the gains. If it is any consolation, I would not be surprised if future taxpayers change the laws to collect taxes on these gains.

I disagree about deferred accounts. The current taxpayers need to pay the bills or quit spending but the future will need the tax revenue. The taxes owed from 401k's are owed to the future to help with the tax burden of the boomers retirement. No, it is not fair to have working people pay full tax and the wealthy pay 15% on the premise that the tax part of the tax deferred money earned more than enough to deserve full taxation. But there is no denying that the deferred retirement plans create "virtual workers" for purposes of taxation (low paid workers). They do not increase productivity which will become a drag even if taxes are collected from the virtual workers.
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