Currently, rumors have been floating like broom-seated witches in the wind that the government wants to not only overhaul America’s pension system, but replace it with its own.  Nationalization then is the buzz word here.  Private plans such as IRAs and 401(k)s would ultimately be eliminated (National Seniors Council).

How tenable are such rumors?  We do know that the Labor Department has been looking at pension reform, soliciting input from several interests such as the AFL-CIO, who are urging more government regulation of private retirement accounts and maybe replacing 401(k)s, for example, with government annuities.  Some on the Left argue that 401(k)s and IRA’s discriminate against the poor.

Those on the right, however, fear that the government would set-up its pension annuities similar to Social Security, which is invariably used as a slush fund to buoy up government spending.  Benefit taxes would be subject to a sliding scale based on individual or family income. In short, redistribution would be built in.

Now let me give my view, not necessarily pleasant, but hardly fraught with fear-mongering conspiracies of a Marxist coup d’etat.

Yes, government is seeking to overhaul the pension system, but only to generate more revenue.   Huge deficits can’t continue without having to pay the piper.  Ask the Europeans.  Washington isn’t interested in nationalizing the pension system, though Argentina is about to do it, or eliminating private pension options.

Let’s take your IRA or 401(k), for an example of the way government sees them as potential sources for increased revenue.  At age 70.5, you have to make regular withdrawals known as “required minimum distributions”.  You pay a tax on those withdrawals, but they can be strung out over a very long duration, depriving the government of revenue.

As is, present contributions to 401(k)s are anticipated to swell tax deferrals by the billions in coming years.  For instance, backtracking to fiscal 2011, deferrals resulted in an estimated $111.7 billion revenue loss.  For 401(k)s alone, the loss is put at $67.1 billion (egis.ebscolhost.com).

Then there’s that issue of fairness I mentioned at the outset.  While you’re currently allowed in 2013 to contribute as much as $17,500 and a catch-up contribution of $5,500 for those age 50 or over, how many of us can actually contribute anywhere near the maximum?  But the rich can and do, reaping substantial tax benefits.  It’s the old formula perhaps that money makes money.

I think you get the picture.  Even here in Kentucky where I live, state government is looking for increased revenue sources too.  Currently, it’s on the drawing board to tax Social Security benefits just like the federal government.  By the way, while some states may seem tax havens for retirees,  know that laws can change.  Right now, Kentucky’s Homestead Exemption Act provides a break in taxes on property assessed value for senior citizens at age 65.  Even that isn’t chiseled in granite.  In 2011, Minnesota dropped their provision.

Conspiracy?  Socialist take-over?  No way!  The fact is that we live in lean times.  The challenge is then to cut spending meaningfully and fairly and safely.  But how you do that in a long-term marginal economy has thus far eluded resolution.

rj