Converting 401k and IRA Funds Into "Steady Payment Streams"

George Washington's picture

Last May, I wrote about the rumor that the Obama administration might seize funds from American's 401k and IRA accounts.

Last week, Bloomberg pointed out:

Obama administration is weighing how the government can encourage
workers to turn their savings into guaranteed income streams following
a collapse in retiree accounts when the stock market plunged.


U.S. Treasury and Labor Departments will ask for public comment as soon
as next week on ways to promote the conversion of 401(k) savings and
Individual Retirement Accounts into annuities or other steady payment
streams, according to Assistant Labor Secretary Phyllis C. Borzi and
Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the


There is “a tremendous amount of interest in the White
House” in retirement-security initiatives, Borzi, who heads the Labor
Department’s Employee Benefits Security Administration, said in an


In addition to annuities, the inquiry will cover other
approaches to guaranteeing income, including longevity insurance that
would provide an income stream for retirees living beyond a certain
age, she said.


“There’s been a fair amount of discussion in the
literature taking the view that perhaps there ought to be more lifetime
income,” Iwry, a senior adviser to Treasury Secretary Timothy Geithner,
said in an interview...


One proposal raised by Iwry as co-author
of a paper while at the Retirement Security Project, before joining the
administration, has reached Congress. A bill requiring employers to
report 401(k) savings both as an account balance and as a stream of
income based on an annuity was introduced on Dec. 3 by Senators Jeff
Bingaman, a New Mexico Democrat, Johnny Isakson, a Georgia Republican,
and Herb Kohl, a Wisconsin Democrat.

Sounds innocuous, right?


But Karl Denninger and Jesse smell a rat.

Denninger writes:

In a short conversation this noontime ... Rick Santelli was talking about a potential to effectively force money into the Treasury market.


Where would they get this?


From your 401k and IRA accounts!...


Let me tell you what this is - it is an attempt to prevent the collapse of the Treasury market!


Forcing people into Treasuries as an "annuity" is exactly what Social Security allegedly is. Except that Treasury stole the money that was collected in FICA taxes and spent it!


what? They'll do that here too - you're going to "invest" in Treasuries
which of course are effectively a CALL option on the future taxing
ability of the government.


The problem is that with an aging population and the immigrant problem (illegal immigrants that is), along with offshoring, the aggregate wage base will drop and thus this is the most dangerous investment of all!

even worse is that the government has intentionally suppressed Treasury
yields during this crisis (and will keep doing so by various means,
including manipulating the CPI - the "inflation index" - as they have
for the last 30 years) so as to guarantee that you lose over time compared to actual purchasing power...


have a funny way of turning into mandates, and this looks to me like a
raw admission that Treasury knows it will not be able to sell its debt
in the open market - so they will effectively tax you by forcing your
"retirement" money to buy them!

This may be the
only way for Treasury to hold down interest rates to something
reasonable in the intermediate term, but doing so will instantaneously
remove a major source of funding for the stock market - that is, the
monthly and quarterly inflows from retirement accounts.


You can bet this won't be good for you, the ordinary American.


can also bet that once such an "option" is made available there is a
very high probability of the government doing things that either
promote or simply don't stand in the way of another stock market crash
as a means of "herding" your money into Treasuries - so they can blow
it - all under the guise of being allegedly "safe".


Of course this begs the question - what
if the government can't pay down the road when you retire, just as they
can't pay on a forward basis with Social Security and Medicare?


This "proposal" can only mean one thing - Treasury smells smoke. Maybe you should pay attention to what they're huffing!

And before you say "oh they'd never do that" I want you to read this:

is a warning to us all. The Argentine state is taking control of the
country’s privately-managed pension funds in a drastic move to raise



My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so.
The forced-feeding of banks with fresh capital – whether they want it
or not – and the seizure of the Fannie/Freddie mortgage giants before
they were in fact in trouble (in order to prevent a Chinese buying
strike of US bonds and prevent a spike in US mortgage rates), shows
that private property can be co-opted – or eliminated – with little due
process if that is required to serve the collective welfare.

Jesse has a similar take:

a rule of thumb, the worst possible time to convert lump sum savings
into a fixed income annuity would be when interest rates are
historically low.

Although products may vary, this is roughly
equivalent to buying long term bonds at a time when interest rates are
likely to increase, substantially reducing your principal in real
terms, and eroding your fixed returns through inflation.

some reason the Obama Administration is promoting the idea now that
there should be some encouragement for Americans to start converting
their 401K's and IRA's into annuities, to provide themselves with
lifetime income.

The effort is being spear-headed by Mark Iwry of the Treasury and Phyllis Borzi of the Department of Labor. Here is a paper written on the subject by Mark Iwry when he was at the Brookings Institution.

essence of this paper is that distributions from IRA's and 401K's would
automatically be rolled into an annuity providing a monthly income by

This concept is known on the Street as the handling
fees for meager returns pork barrel pigfest. The Fed likes it because
they will undoubtedly get a two year rolling chunk of the people's
retirement cash to play with.

Perhaps just rolling those 401K's
and IRA's into Social Security or the Long Bond would be what they have
in mind. Somehow the panacea of TIPS with inflation defined by the
government sounds probable. The drawback perhaps is that this would not
generate the highest recurring fees for Wall Street and the FIRE
sector, which have to be eyeing that 'cash on the sidelines' hungrily.

How about Patriot Bonds
that are fully invested in Mortgage Debt formerly owned by the Fed,
with some tranches of Commercial Real Estate to add some zest to the
recipe? The Treasury can give this option a small tax break, which can
be largely consumed by Wall Street fees and mispricing of risk returns

My model for thinking about this annuitization is that the
government wishes to appropriate your savings for a 2.0% return, ex
fees and mispriced risk and inflation, as a source of funding for the
bailouts of an oversized and insolvent FIRE sector (like AIG) and the
imploding pretensions of a global financial elite...

Administration Explores R Bond For Retirement Accounts - Investment News 7 June 2009

have a separate "R Bond" instead of those government bonds they have
now called 'Treasuries?' And why have a mandatory universal retirement
system when you have this thing called 'Social Security?' Think about
it. Sounds like the kind of preparations governments make for things
like 'new dollars' after a selective default.

Are Denninger and Jesse right?

I don't know ... we'll have to wait and see.