The Independent Market Observer

11/28/12 - Disaster Chic: Government and Retirement Accounts

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Nov 28, 2012 10:17:22 AM

and tagged Fiscal Cliff, Debt Crisis

Leave a comment

I have been getting a number of questions recently about a number of e-mails and webpages that predict certain disaster. The scenarios include a collapse of the dollar, hyperinflation, confiscation of private retirement accounts, and many other similar things.

Amazingly enough, many of those making said predictions have a solution, which can be had for a very reasonable price. Paid, of course, in U.S. dollars to a U.S. address.

I find it interesting that so many of those predicting systemic collapse are still living and trying to get paid in that same system. To me, this suggests that perhaps collapse is not, in fact, imminent. Those who are voting with their feet, and leaving the U.S., are of course excluded from this comment, but it doesn’t seem there are that many of them.

Nonetheless, many of the people asking the questions are legitimately concerned about the issues raised, as they should be. If any of the predictions come true, we certainly need to be prepared to react, and if the worst of them come true, it really would be the end of the world as we know it. So let’s take a look at some of the common predictions and see how they might actually play out.

I will start with the government confiscation of retirement accounts, as that is the question I got this morning that sparked this post. The prediction is that the government, needing the money, will confiscate private retirement accounts either directly or by requiring investment in Treasury bonds in all such accounts.

First of all, direct confiscation would require unprecedented legal action, which I don’t think is likely. We can’t even raise marginal tax rates back to the levels of the 1990s, as you may have noticed; how would we agree on confiscating private wealth? Moreover, why would the government start—or stop—with retirement accounts? If the government wants to confiscate wealth, it is far more likely to start with inherited wealth in the form of a much larger estate tax, which is also a nonstarter. Overall, this is a political dud, not to mention the Supreme Court would also have something to say.

So let’s move on to requiring retirement accounts to invest in government bonds. This is so feasible it happened decades ago—it is called social security and is the default retirement plan for most of the population. For those lucky enough to have pensions, they probably will find that they are required to have a substantial portion invested in government bonds. Ditto for people who own target-date funds. For people who are getting up there in age, most standard asset allocation models also have a large fixed income component, at least some of which is likely to be in government bonds. If a change like this were to be made, the difference might actually not be that large overall—but the change would require political action, and that does not seem likely.

Finally, what would happen if, for example, all private retirement accounts were required to invest only in government bonds? Well, that would require liquidation of all equity holdings, real estate holdings, and so forth, which would cause massive market disruptions and declines in asset prices across the board—in other words, chaos. Rather counterproductive overall.

The actual prediction, as best I can determine, was based on a government plan to require businesses that do not offer retirement plans to contribute to a government-operated plan on behalf of their employees. In other words, offer an option to those who currently do not have one. Even there, employees can opt out. Not a word on existing private accounts.

The general methodology of these predictions is to take a factual event or trend, extend it without considering any countertrends or arguments, garnish it with a partisan alarmist series of quotes from seemingly authoritative figures, and deliver it in as breathless a manner as possible. Because they are typically derived from real trends, and represent real issues present in people’s minds, the predictions acquire credibility. And indeed, if any trend continues, disaster ensues.

The reality is, our problems are solvable without massive wealth confiscation. Change only occurs when the pain of the status quo is greater than the pain of change, which for this prediction is definitely not the case. Worry about your investments, not whether the government will be coming to get them.


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®