The pension bandits are on the loose - Bill Clinton's economic proposals to tax pension contributions and investment earnings - Column

0 Comments | Insight on the News, March 15, 1993 | by Paul Craig Roberts

President Clinton is proposing to grab $450 billion of our accumulated private pension fund assets, thereby seriously reducing our living standards during retirement. In addition, he is proposing to make us pay income tax on both annual contributions to our pensions and earnings of the pension investments.

To carry off his scheme, he has nominated a vociferous advocate of pension taxation, Alicia Munnell, to be assistant Treasury secretary for econornic policy. Munnell believes that the United States does not invest enough in public works projects and that part of our pensions should be confiscated to pay for more federal boondoggles.

According to Munnell, "If these funds were used either to reduce the federal government deficit or to invest in infrastructure or education, they would increase the resources available for future generations."

Of course, if our pensions are used for government programs, they cannot support us in retirement. Clinton talked about "putting people first," but what he is doing is putting government first.

Munnell argues that pension contributions have an undeserved "special tax treatment" because we are not taxed on the money until it is paid to us as retirement income. But that is the way it should be. One reason governments do not tax people on unrealized or future income is that without the income in hand there is no money with which to pay the tax.

Few people have the slack in their budgets to pay the tax on their retirement income in advance. The only other way to pay the tax would be to take it out of the pension contributions, which would dramatically reduce the retirement nest egg.

Since our pension contributions and the earnings they accumulate are not available to us as current income, it makes perfect sense that they not be taxed. Munnell's argument that postponing taxation of future income is a tax break would also apply to unrealized capital gains in our homes and other assets and to any inheritance.

Indeed, if Munnell's logic were applied consistently, everyone would be taxed at birth on his expected life earnings - otherwise we would benefit from what she calls "an interest-free loan from the Treasury."

The taxation of future retirement income is a callous and hypocritical proposal from Democrats who claim to be concerned about declining family living standards and low savings rates. Americans cannot pay new taxes on retirement funds, medical benefits and energy use without experiencing precipitous drops in living standards.

Munnell probably would not be content to force us to pay taxes on future retirement income. She also wants the government to confiscate 15 percent of all accumulations from pension funds. This is to make up, she says, for failing to tax the pension funds in the past.

The implications of this reasoning are extraordinary. Every time the government comes up with a new tax, it can demand a share of our wealth on the grounds that the item in question wasn't taxed in the past. If we apply Munnell's reasoning, for example, to the tax that the Clintons plan for our medical benefits, it means the government is entitled to 15 percent of our savings accounts and home equity to make up for the previous "tax break" we enjoyed when medical benefits were not taxed.

Ditto for the tax on energy use that the Clinton team has in the works.

Munnell would come to the Treasury from the Federal Reserve Bank of Boston, where she directed propagandistic "studies" that have destroyed the research reputation of that bank's staff. Forbes magazine exposed her most infamous study, released in October, which claimed to prove racial bias in mortgage lending because a higher percentage of minority applicants than of white applicants were rejected. The study managed to produce this politically correct conclusion by failing to control for creditworthiness and default rates.

As Forbes noted, the study actually revealed that the mortgage market worked perfectly, allocating loans to individuals irrespective of race, based on their creditworthiness. The proof of the market's success lies in the equal default rates among black and white mortgage borrowers. Discrimination would have produced lower default rates among black borrowers - indicating that higher standards had been applied to black borrowers than to white. When confronted by Forbes with the lack of evidence of discrimination, Munnell admitted that she had no evidence but justified herself on the basis of her belief that discrimination occurs.

In other words, in the Boston Fed's research, beliefs, not facts, drive the conclusions.

Munnell-watchers believe that the discrimination study had an ulterior motive. Munnell fervently believes that the United States suffers from insufficient public investment. With growth in entitlements eating up ever more of the budget and driving it deeper into the red, and with taxes generally high, the only sources of funds are the assets of the private banking and pension systems.

If banks can be portrayed as discriminatory in their lending, political pressures can be put on them to make amends by making more of their assets available for government purposes. For example, there are schemes to have banks purchase a new kind of bond that would be issued by public authorities to finance inner city reconstruction and education projects.