John McCain wants to secure your retirement account by making it easier for you to liquidate it
On Monday Barack Obama unveiled a less-than-compelling list of new economic proposals to combat these economic hard times. Now John McCain has his own new list, dubbed the Pension and Family Security Plan. And guess what! His proposals may be even less compelling than Obama's! The three McCain ideas I hadn't heard before are:
1. Withdrawals of up to $50,000 a year from tax-preferred accounts--IRAs and 401(k)s--should be taxed at 10% in 2008 and 2009.
2. The amount of capital losses which can be used to offset ordinary income should be increased from $3,000 to $15,000 in 2008 and 2009.
3. The maximum long term capital gains tax rate should be reduced to 7.5 percent in 2009 and 2010.
No. 1 is interesting. McCain has already proposed (and Obama has endorsed the idea) that seniors should be free not to make withdrawals from their retirement accounts if they don't want to. Now he's saying they should get a tax break if they do make withdrawals. I guess the idea is to give them more flexibility, which is probably a good thing. McCain's tax cut, though, would also seem to give those below retirement age more incentive to withdraw funds too. My least favorite among the four new proposals Obama unveiled yesterday was one to suspend the 10% tax penalty on retirement account withdrawals before the age of 59 1/2. McCain would keep the 10% penalty, but by cutting the tax rate on withdrawals to 10% you'd get pretty much the same effect. Unless his tax break were restricted to those 59 1/2 and older. Which would be so age-ist.
I guess No. 2 would have some impact as a relief measure, but it would also give people strong incentive to sell assets over the next couple of years, thus putting continued downward pressure on prices. Same with No. 3. There's an argument to be made that permanently lowering the capital gains tax rate would raise asset values and make the economy more productive and yada yada yada, although the capital gains rate is already so low that I think we may be reaching a point of rapidly diminishing returns on that front. But McCain's proposed capital gains tweaks are temporary, and when you're trying to achieve temporary economic stimulus, messing with capital gains tax rates seems like a profoundly inefficient and maybe even counterproductive way to do it.
McCain's much-maligned proposal to spend $300 billion buying up mortgages is more promising than any of these, I think. Yeah, it's poorly formulated, and needs big changes to be anything but a windfall for both lenders and homeowners. But if tweaked into a something like a shared-equity mortgage plan, where government gets some of the upside, direct government purchases of mortgages would probably make sense.
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Neither plan makes any sense, because those who can afford to should have to tighten their belts considerably, while those who are living on their last belt notch already should be getting help directly from the government -- and it should be funded by a "claw back" tax on wealth that has been accumulated/realized over the last seven years of fiscal irresponsibility and greed.
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My gut feeling is that the very worst time to withdraw money from a retirement fund is when the stock market is tanking. Sure, in a real emergency, you may need to take a bath for a quick fix. But how many people today understand the concept of "real emergency", or the consequences of withdrawing from retirement funds? And what has been the track record so far with easy credit?
BTW, Tom the Dancing Bug doesn't have a very high opinion of contemporary consumer habits:
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Then again, even in a real emergency you should be able to work out a payment plan (say with the hospital) so that you still don't need to touch your retirement funds. Maybe I'm wrong on that.
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I watched last week's debate, and I read McCains plan today. Would somebody correct me if i am wrong about this, but isnt Obama's plan re: 401k he suggested yesterday what McCain had suggested in the debate last week? And then in his speech today, McCain specifically targeted Obama's 401k plan as bad?
maybe I took something out of context, but McCain has me at a loss here.
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I'm concerned that too many people just don't get it.
To reach a stable base on the economy, you have to sure up the price of houses. How do you do that? You can either try to spur inflation by dropping the fed funds rate or create jobs!
We have tried the first. At some point, further fed funds rate just don't translate into lower rates. I have a 4.5% rate on my house. Asked if I could get lower back when the rates hit as low as they ever had, and every bank said absolutely not. Why? I presume nobody wants to take the bad business of lending money out at rates less than the actual rate of inflation.
Further, we are finding out that cheap money is no good if it will not be lent at attractive terms to individuals who have the means to repay. So, in my mind (and maybe I'm wrong on this), any person who is to have credibility in talking about the economy had better be talking about 1st) job creation and 2nd) job creation followed by 3rd) getting the LIBOR down.
My .02
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On the other hand, you can argue that the housing market was so artificially inflated in recent years that the only healthy thing to do is let it settle again. True, it shorts a lot of people (including me if prices fall back more than 5 years). But perhaps future gains will take place at a more reasonable pace.
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