Supreme Court: Creditors can't seize IRAs (or Social Security); Another reason low-income workers should support Social Security Reform
Re: Supreme Court: Creditors Can't Seize IRAs
http://news.yahoo.com/news?tmpl=story&u=/ap/20050405/ap_on_go_su_co/scotus_bankruptcy
or
http://ap.washingtontimes.com/dynamic/stories/S/SCOTUS_BANKRUPTCY?SITE=DCTMS&SECTION=HOME
or
http://www.washingtonpost.com/wp-dyn/articles/A24753-2005Apr4.html
The Supreme Court ruled today that bankruptcy protection extends to Individual Retirement Accounts, giving IRAs the same protection already afforded to Social Security Benefits and 401(k) accounts.
The issue was that since it is possible to withdraw from IRAs before retirement age some creditors argued that IRAs should not receive the same type of protection as other retirement accounts. The Court noted that the penalty for early withdrawal was large and that few people under the age of 60 took early withdrawals, demonstrating that in theory and practice IRAs do work as benefits based on age.
My first thoughts upon hearing the ruling were not about IRAs though, since I don't have one. (I'm self-employed so I have a different retirement account structure.)
Here was my train of thought:
- Social Security benefits and "accounts" (that don't really exist now) are protected in bankruptcy.
- Low-income workers are more likely to file for bankruptcy than higher-income workers.
- Low-income workers generally can not save enough to have IRAs or 401(k) accounts.
- Therefore, personal Social Security accounts give low-income workers a new ability to invest in stocks or bonds AND to have those investments protected during bankruptcy, a protection many market investors today do not have (or at least have only with the portion of their investments that is in retirement accounts.)
So, which would you rather have: A) The current system where returns are tiny and your benefits are at risk due to the bankruptcy of Social Security itself, or B) Personal accounts where you can get higher returns (with potentially less economic risk and much less political risk) with protection if you must file for bankruptcy yourself?
Today's ruling, although not about Social Security, highlights yet another excellent reason for low-income workers to support voluntary personal retirement accounts being funded with a part of their payroll taxes.
The more I think about it, the less excuse there is for any objective analysis to come down against personal accounts. And the more certain I am that the major forces against Social Security reform are all about power politics (i.e. government's addiction to spending and the incestuous relationship between unions and the Democrats) and nothing about benefitting citizens of any economic class.
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Yours truly
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04/05/05 @ 12:51:47 am
This brings to mind a couple concerns of mine:
(1) I have read a claim (in a newspaper article) that one complaint regarding SS reform is that workers in specific age cohorts (those close to but not yet 55) are likely to lose ground under reform. This group also won't receive much protection from creditors because they won't have time to build up any substantial balance in their personal accounts.
(2) I have also read that workers will see lower benefits under the president's plan than under the current system, because benefits will become indexed to inflation rather than to a worker's past wages. This appears hopeful to me, since my wages have acttually lagged behind inflation. Can I therefore expect that under reform, my scheduled retirement benefit will be greater than my currently scheduled benefit?
04/05/05 @ 01:32:44 am
WCV,
These are both interesting questions. I think the first is a political question and the second an economic one.
As for number 1, there is no way that a proposal will be put forward which economically damages those near or at retirement age. Keep in mind the common political wisdom which says that a person's likelihood of voting is proportional to his/her age. There's simply no way something will even be discussed which hurts 50-year old people.
As to protection from creditors, it's clearly true that the point I made about this is important proportionately to how many years someone would have contributed to a personal account. So it helps younger workers more than older. But this does not mean it hurts older workers. It simply won't effect them in an important way.
I have not seen or heard any credible argument (or maybe not even an incredible one) saying that people near 55 will lose ground under reform. If you heard that, I'd say it's a scare tactic being used by unions and the AARP without any factual basis. If you can send me a reference I'd love to see it and refute it with the facts.
On point #2, it's probably right that a "final" proposal will include lower benefits, but not because of personal accounts. Lower benefits are simply a necessary change to avoid absolute collapse of the system in less than 20 years.
I believe you are interpreting the current reform discussion incorrectly. My understanding is that benefits will become indexed to inflation rather than to an economy-wide index of wages. They were never indexed to an individual worker's past wages. Keep in mind that indexing represents how benefits increase beyond the worker's actual contributions and has nothing to do directly with the changes in those contributions.
For example, imagine you had a bank account into which you deposited $10 in the first month and $1 more each month for the rest of a year, ending by depositing $21 in month 12. Also imagine that the bank account paid interest at the "Fed Funds" rate, i.e. a rate which changes occasionally when the Federal Reserve Bank changes rates. Your total contributions have been $186, but your benefit growth is essentially "indexed" to that interest rate. The $1 increase per month in your deposits does contribute to your final benefits but is not part of indexing. In the simplest terms, indexing is what makes your benefits change when you're not contributing just as interest makes your bank account go up when you're not depositing.
We have had a system which was unjustifiably generous to retirees in that it based COLAs (Cost of Living Adjustments) on a wage index rather than a price index. The wage index almost always increases faster than prices, so benefits increased faster than inflation which is financially unsustainable in a pay-as-you-go system where revenues are not actually invested in anything.
Therefore, to answer your concern #2 directly, even though your wage growth has lagged inflation, the change in indexing will be a negative to your benefit payments in the same proportion as it would be for someone whose wages grew faster.
I'd like to make a point that should be especially important to you:
If your wages have lagged behind inflation, the current system is killing you even with today's wage-based indexing. Sure, the indexing is generous but it is indexing you up on amounts which are increasing by less than inflation meaning you are likely falling ever further behind.
I belive that a personal account should be even more compelling to you than to most people. This is because financial markets almost always demand and provide returns in excess of inflation (at least over a medium or long time frame) whereas contributions to Social Security don't. (They did a long time ago, but no longer.)
For a worker whose wages lag inflation, the current system is devastating to retirement security while personal accounts offer greater relative improvement to long-term financial health than they do for higher-income workers. Simply put, a personal account can help you recover from slow wage growth.