People of a certain age remember "Synchronicity" as that wildly popular 1983 album by The Police. That the album was also the soundtrack to the semester I spent studying Carl Jung is a small example of the idea. To briefly sum it up and disappoint my professors, I offer the Wikipedia definition of the Jungian concept: Synchronicity is the experience of two or more events that are apparently causally unrelated ... yet are experienced as occurring together in a meaningful manner. Mr. Jung gave mystical and profound examples of the phenomenon. Sting gave us the synchronicity of a monster crawling out of a lake at the same time a suburban dad was about to explode from years of suppressed rage. But I give you a decidedly mundane example: 401(k)s.
As workers who have them know, 401(k)s provide quarterly statements. I have been getting statements on our 401(k)s four times a year since the late 1980s and have barely glanced at them. This April, as the first-quarter statements arrived, I sat down with all of them, added them up and was pleasantly surprised. My eyes were opened, but then, as if I had sounded an alarm, the sleeping eyes of government opened as well. Last month, the news broke that the Obama administration is eyeing 401(k)s as a revenue source.
His plan would end the tax break for 401(k)s that hit the $3 million mark, meaning any contributions made above and beyond that amount would no longer be tax deferred. The $3 million figure was arrived at by calculating that this amount buys an annuity that would pay out about $200,000 per year. Before you grow apathetic on populist grounds like "my 401(k) is nowhere near $3 million, so what do I care," take a look at the problems with this plan that could come back to haunt you.
Lou Ingargiola of Ingargiola Wealth Management Group explains that one of the problems has to do with how the administration arrived at the $3 million figure.
"The annual payments you get in an annuity fluctuate, primarily due to current interest rates, which are now near record lows. When interest rates increase, a lump sum generates higher payments. If interest rates rise, the $3 million threshold would fall," he said. Just as the Alternative Minimum Tax requires yearly fixes to avoid ensnaring the middle class, so would the arbitrary cap on 401(k)s - unless, of course, the plan is to end tax breaks for 401(k)s entirely. Some pundits believe this is the ultimate scheme and that the $3 million is simply an opening salvo meant to soften savers up for a bigger tax grab.
Another problem cited by many business pages is the fact that ending tax-deferred growth in 401(k)s may prompt companies to stop offering them. Investment News explained the problem best by reviewing the history of private-sector pensions, now virtually extinct: "One trigger for the decline in DB (defined benefit, or pension) plans was legislation passed in 1987 that capped the maximum salary on which a tax-exempt pension benefit could be based at $235,800 per year. The immediate result was a surge in DB pension plan terminations as top executives realized that they would get little benefit from the company pension plan, which was a large corporate cost and an administrative nightmare. ... Terminations surged again in 1990 when the salary on which a tax-deferred DB pension could be based was reduced further to $150,000 a year."
In addition to the historical precedent of unintended consequences and the faulty annuity calculations, there is also what I perceive to be a two-pronged moral problem with the plan. The first prong is that it is presumption bordering on arrogance to tell people how much of their own money is "reasonable" for them to save. A 401(k) is deferred gratification and it is demoralizing to savers to be punished for their discipline. The other failing is that 401(k)s are a contract. To borrow the language union activists use to defend public-sector pensions, 401(k)s are a promise. To change the rules, which for many of us have been in place in excess of 25 years, is an egregious breach of contract.
Then there's the whole synchronicity problem. I opened my statements and suddenly the whole world was talking about 401(k)s. OK, I know one had nothing to do with the other, but it doesn't change the fact that once an idea takes root, it is next to impossible to squelch it.
So although Mr. Ingargiola, like most financial advisers, doesn't believe the 401(k) tax plan is going anywhere, he is concerned about a rules change for Roth IRAs. And therein lies the problem: Suddenly all savings plans with a tax advantage are on the table. The previously unthinkable is now not only thought about, it is discussed, debated and has considerable support. These savings, once ignored, have entered the nation's collective awareness and are now lodged there as a tantalizing source of revenue. It's only a matter of time and messaging until the taxman gets it right and makes taking a bite palatable to the public.
If only I could go back and leave those statements unopened, as I always had. Then maybe the Feds would not have awakened, tax-deferred savings plans would still be largely ignored and Sting would not be in my ear singing that infernal song.
ELIZABETH ZYGMUNT is editor of the Northeast Pennsylvania Business Journal. Visit the journal's website at biz570.com and contact her at ezygmunt@ timesshamrock.com. Would you like to write for IN THIS CORNER? Contact us at business@timesshamrock.com