The Democratic Triumvirate: What it really means for the economy!!!

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PART I: House Democrats Contemplate Abolishing 401(k) Tax Breaks-->Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

The following article which was found at:
http://www.workforce.com/section/00/article/25/83/58.php

Additional References are:

http://www.house.gov/ed_workforce/testimony/2008-10-07-TeresaGhilarducci.pdf

http://www.dol.gov/federalregister/HtmlDisplay.aspx?DocId=21625&AgencyId=8

http://www.usnews.com/blogs/capital-commerce/2008/10/23/the-obama-stock-market-discount-may-be-real.html

http://www.usnews.com/blogs/capital-commerce/2008/10/23/would-obama-dems-kill-401k-plans.html

October 16, 2008
House Democrats Contemplate Abolishing 401(k) Tax Breaks . Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive. House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee’s subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute. A plan by Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York, contains elements that are being considered. She testified last week before Miller’s Education and Labor Committee on her proposal.

At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months. Under Ghilarducci’s plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3 percent a year, adjusted for inflation.

The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated. “I want to stop the federal subsidy of 401(k)s,” Ghilarducci said in an interview. “401(k)s can continue to exist, but they won’t have the benefit of the subsidy of the tax break.” Under the current 401(k) system, investors are charged relatively high retail fees, Ghilarducci said. “I want to spend our nation’s dollar for retirement security better. Everybody would now be covered” if the plan were adopted, Ghilarducci said. She has been in contact with Miller and McDermott about her plan, and they are interested in pursuing it, she said. “This [plan] certainly is intriguing,” said Mike DeCesare, press secretary for McDermott. “That is part of the discussion,” he said.

While Miller stopped short of calling for Ghilarducci’s plan at the hearing last week, he was clearly against continuing tax breaks as they currently exist. Savings rate“The savings rate isn’t going up for the investment of $80 billion,” he said. “We have to start to think about ... whether or not we want to continue to invest that $80 billion for a policy that’s not generating what we now say it should.”

“From where I sit that’s just crazy,” said John Belluardo, president of Stewardship Financial Services Inc. in Tarrytown, New York. “A lot of people contribute to their 401(k)s because of the match of the employer,” he said. Belluardo’s firm does not manage assets directly. Higher-income employers provide matching funds to employee plans so that they can qualify for tax benefits for their own defined-contribution plans, he said. “If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets,” Belluardo said.

“This is a battle between liberalism and conservatism,” said Christopher Van Slyke, a partner in the La Jolla, California, advisory firm Trovena, which manages $400 million. “People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny,” he said. The Profit Sharing/401(k) Council of America in Chicago, which represents employers that sponsor defined-contribution plans, is “staunchly committed to keeping the employee benefit system in America voluntary,” said Ed Ferrigno, vice president in the Washington office.

“Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system,” he said. No legislative proposals have been introduced and Congress is out of session until next year. However, most political observers believe that Democrats are poised to gain seats in both the House and the Senate, so comments made by the mostly Democratic members who attended the hearing could be a harbinger of things to come.

Advice at issue, in addition to tax breaks for 401(k)s.

The issue of allowing investment advisors to provide advice for 401(k) plans was also addressed at the hearing. Rep. Robert Andrews, D-New Jersey, was critical of Department of Labor proposals made in August that would allow advisors to give individual advice if the advice was generated using a computer model. Andrews characterized the proposals as “loopholes” and said that investment advice should not be given by advisors who have a direct interest in the sale of financial products. The Pension Protection Act of 2006 contains provisions making it easier for investment advisors to give individualized counseling to 401(k) holders.

“In retrospect that doesn’t seem like such a good idea to me,” Andrews said. “This is an issue I think we have to revisit. I frankly think that the compromise we struck in 2006 is not terribly workable or wise,” he said. On Thursday, October 9, the Department of Labor hastily scheduled a public hearing on the issue in Washington for Tuesday, October 21.

The agency does not frequently hold public hearings on its proposals.

Filed by Sara Hansard of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

Part II: Current and Future of the Stock Market.

We are already seeing the effects of panic set in with the stock market. You see the stock market hedges it's bets with the future. There is a direct inverse correlation to the ups and owns of the market with that of the 2008 Presidential Campaign Polling. When Barack Hussein Obama's poll numbers improve, you can count on the market dropping. What does this tell you? Well it should suggest to you that people are taking the hit today on their investments, because they know they will be donating more of their capital gains next year under the presumptive President Obama. Below is very revealing commentary on just what I am talking about. Special thanks to James Pethokoukis for the following :

The Obama (Stock Market) Discount May Be Real
October 23, 2008 11:00 PM ET James Pethokoukis Permanent Link

Are investor concerns about an Obama presidency influencing the stock market? And by "concerns" I mean "existential panic." And by "Obama presidency" I mean "a tax-hiking and regulatory reign of terror." And by "influencing" I mean "eviscerating." At least that's the overwrought take I get from a few of my more skittish E-mailers. Chillax, y'all!
Now a few of my own (more tranquil) observations about a possible jittery Investor Class, the plunging market, and the now famous Obama Discount Theory:

1) I find it hard to believe that fears about a deep recession are suddenly dawning upon investors and thus are solely responsible for kneecapping the market. I've been hearing such dire forecasts for weeks from top Wall Street economists, and I really think they're already baked into the cake. (And credit markets actually look like they are finally picking up a bit—a plus for stocks.) So with that perception locked in, maybe the future political landscape is finally playing a greater role in the minds of investors, especially with polls showing a possible landslide Obama win and big Democratic congressional majorities. Is it really more plausible to suggest no effect whatsoever from a possible once-a-generation, political sea change, especially one that moves away from the winning economic formula of the past 25 years ? Not even a smidgen of worry? C'mon, now.

2) Obama wants to raise capital gains taxes on a good chunk of the money currently in the market. Nearly 80 percent of total stock holdings are held by people who would be subjected to higher investment taxes. Not only does that hurt their future after-tax returns, but it also undercuts the future productivity of the economy, thus crimping the future stream of earnings generated by corporate America. So the whole stock market will suffer from a sort of collective tax punishment. Hey, even potential Obama Treasury secretary Jamie Dimon thinks raising taxes right now is a goofy idea.

3) Then there's the Joker Scenario, inspired by one of my favorite schemes concocted by the Clown Prince of Crime. It's the one where he poisons various toiletries like shampoo, deodorant, soap, and toothpaste. But only when used in combination are they deadly. Investors might not be worrying so much about a Democratic president, given the current one-way state of the polls, as they are about the combo of Obama + Nancy Pelosi + Harry Reid. And you can toss Charlie Rangel and Barney Frank into the mix as well. Recall what Frank said the other day: "Yes, I believe later on, there should be tax increases. Speaking personally, I think there are a lot of very rich people out there whom we can tax at a point down the road and recover some of this money." Look for Democrat proposals for a "millionaire's surtax" on top of the higher rates from repeal of the Bush tax cuts in 2009. Or how about this idea to do away with 401(k) plans. Maybe the risk of a deluge of ill-conceived ideas is apparently why, according to my pal Amity Shlaes, split power in D.C. produces an average 9 percent positive return for stocks vs. a negative 8 percent when one party holds Congress and the White House.

4) It's certainly true that recent polls have McCain with only a narrow lead, at best, over Obama among self-described members of the Investor Class. Yet I would hazard a guess that active investors are far more conservative—even libertarian—in their economics than the great mass that is 401(k) nation. (That sure has been my experience.) They are likely the ones selling hard right now.

5) Then there's the Great Experiment of 2009. In 1980, anxious Americans voted for lower
taxes and smaller government as the solution to the nation's economic ills. Would the opposite prescription also have led to a 25-year economic boom? With Obamanomics, voters may be about to play a fascinating game of "what if." Except it's for real. When Goldman Sachs ran a sophisticated economic simulation of the effect of a total repeal of the Bush tax cuts, the computer predicted a 3 percentage-point drop in GDP. Maybe investors fear that with perhaps a trillion-dollar budget gap ahead, revenue-hungry Dems will raise taxes further than Team Obama is suggesting—right into the teeth of a weak economy. What if, indeed.