Balanced Budget Amendment…Is the Time Right?

With all the large spending bills in the last year and some change, and with more on the way, such as potential health care reform, a jobs stimulus bill, etc, it has finally got me to thinking….  Are we ready to finally have a serious discussion on a balanced budget amendment for our Constitution?

I don’t know about everyone else, but I’m really beginning to think that this Democratic Congress’s PAYGO rules really are nothing but a lot of cloak and dagger stuff.  With a $787 billion stimulus, approximately $80 billion for jobs creation, more than $500 billion for health care reform, and however much cap-and-trade will cost.  PAYGO, in my opinion, really isn’t getting the job done here.

We have a $12 trillion debt, and Congress, just earlier this week, passed a bill to increase our debt limit so our government can continue to operate.  This fiscal year alone we have a $1.5 trillion debt according to usdbetclock.org.  This issue becomes even more complex once baby boomers begin retiring and collecting social security benefits and also enroll in Medicare.  We already have so many unfunded liabilities in these entitlement programs, and with not enough younger workers to keep the system afloat, we are coming up on some dire financial straits.

Here in the Commonwealth of Virginia, we have a balanced budget amendment in our state constitution.  Our biennial budget is required to be balanced, and if we have any shortfall from tax revenues, the state is required to cut spending on programs, or find other ways to save costs.  This approach has allowed our Commonwealth to continually be named as one of the best states ran in the country.  I, as I’m sure many other Virginians, are pleased to know our state isn’t allowed any deficit spending in our budget.

I truly believe such an approach would work on the Federal level and would bring more fiscal responsibility to our country.  Our elected leaders on Capitol Hill would think several times before enacting spending legislation.  Now, how much support this amendment would have with our liberal Democratic friends and their Progressive allies, that remains to be seen.

Speaker Pelosi and the President and his OMB Chief Peter Orszag have indicated their willingness to address our ever-increasing deficit, but I realize, with a progressive liberal agenda, that our current leaders envision, a balanced budget amendment doesn’t necessarily fit into those plans.

I truly hope our political leaders can truly begin to discuss with a sense of seriousness a balanced budget amendment to our Constitution.  Not only would it bring us a more fiscal security with the Treasury, but it would also have benefits for our domestic economy, that should eventually trickle out to the global economy.

Will Democrats Guarantee Retirement?

So, today, I was reading various mainstream media sites, and I came across something interesting on ABC News’ site.  A column by David McPherson, entitled, “Movement to Scrap 401(k)s Gains Traction.” 

Now, myself, and I realize, many others, have lost a lot of money in their retirement accounts over the course of this calendar year.  The fact that your retirement account balances can decrease should not come as any surprise to anyone.  However, just the events of the past few weeks have caused our Congressional leaders, to really delve into the situation.

According to the House Committee on Education and Labor, “American workers have lost as much as $2 trillion in retirement savings over the last year.”  As a result of this situation, a plan, that was developed by Teresa Ghilarducci, a professor of economic policy analysis at the New School for Social Research, is being touted on the Hill.

These plans are called “Guaranteed Retirement Accounts.”  The basics, are as follows, and I have quoted this from David McPherson’s article on ABC News.com:

• Employees would make mandatory contributions equal to at least 5 percent of their earnings.  Workers could contribute higher amounts if they wish.
• Those contributions would be offset by a $600 federal tax credit each participant would receive.
• As with a 401(k) plan, workers would have individual accounts they could track.  The balance of each account would depend on each worker’s contributions and income level.
• The Social Security Administration would handle account management, and the Thrift Savings Plan — a well-regarded retirement plan for federal employees — would manage the money.
• Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent.
• At retirement, participants’ account balances would be converted into a lifetime stream of income that adjusts for inflation.  There would be options to take partial lump sum payments, opt for lower payments in return for survivor benefits and, upon death, leave a portion of a financial account balance.

As I mentioned earlier, this plan was proposed on October 7th, in a hearing of the House Committee on Education and Labor.  Additional information on the result of that hearing, plus an archived webcast, can be found here.  A detailed version of Dr. Ghilarducci’s plan can also be found at the same location.

Part of this plan, requires changes to the tax credits that are received by 401(k) providers.  Now, from first hand experience, I can tell you that fees are high with 401(k)s, Dr. Ghilarducci will get no argument from me there; however, that is pretty much where we cease to agree.  She’s talking about $80 billion in tax credits, and these credits would be rolled back to pay for the $600 tax credit for each worker.  Now, I won’t claim to know how many actual workers there are in our economy; however, something tells me that the money she’s proposing would greatly exceed $80 billion. 

Another issue I have with this proposal, is the idea that it would be ran by the Social Security Administration.  First off, Social Security is in dire straits.  A program that is ideal in theory has not worked in practice.  If Congress were to guarantee retirements, like Social Security is supposed to be, well, this program will be ran in the red as well.  Do we really want to trust Uncle Sam with more of our money?  We’re also talking about a mandatory 5%.  Sounds like an additional payroll tax to me.

Another problem I have with this plan is this.  What if we go through a period of very low inflation?  For the sake of argument, let’s say we have around 1% inflation.  So we’re talking about a 4% return on investment.  Now, why would I want to have 4% return, when I know, in a period of low inflation, I could probably see somewhere around 7%?  (These numbers are for the sake of argument only.)

Another item I may have a problem with is the choice of funds.  My guess would be is that these would be very safe funds, and that we would not have a choice.  The government would choose which funds the money would go into, and we could check our balances whenever we wish.

This smacks of lack of trust.  Lack of trust in ordinary Americans to freely choose what is best for them.  Are we entitled to income during retirement?  I am of the opinion that we are not entitled to anything!  Plan and prepare well enough, and you can have enough income for retirement.  It’s tough out there, I know, but we can’t have the government coming to our rescue.  If people choose not to save, that’s not Uncle Sam’s problem. 

If this plan is enacted, you can say goodbye to 401(k) plans as you know it.  Now, questions I have about this plan, and they are not in any particular order are:

1. Will employers match the required 5% into these Guaranteed Retirement Funds?
2. Will these benefits be taxed during the distribution period?
3. What will happen to other retirement based accounts, such as Traditional and ROTH IRAs?
4. What will keep the government from tapping into these funds for their pet projects like they have with the Social Security Trust Fund?
5. What about Social Security?  It has been argued this pension will supplement social security.  Well, if we’re talking about guaranteed retirement accounts, how will this fix social security?

We all know the social security system is broken, and that our Congressional leaders are scared to even talk about it, that’s how politically divisive this issue is.  I would argue, that if we move to guaranteed retirement accounts, that perhaps social security needs to be phased out, instead of having TWO separate plans.  Instead, this time set the system up right in the first place!