President Obama’s proposal to limit the value of 401(k)s, pensions and other tax-favored retirement accounts to about $3.4 million certainly sounds reasonable. After all, at a time of big budget deficits, we shouldn’t subsidize “the rich” with tax breaks, should we?
But when you look a little closer — especially when you look at the value of Obama’s own taxpayer-funded retirement benefits — you might think a little differently about what “rich” means.
For starters, the point at which Obama wants to eliminate the ability of you and your employer to deduct contributions to your retirement account isn’t actually the $3.4 million in his budget proposal — that’s just an estimate. The real number is how much a couple age 62 would have to pay for an annuity that yields $205,000 a year. That $3.4 million — which applies to the combined values of your pension and retirement accounts — is subject to a sharp downward change in the future because annuity issuers charge significantly less for an annuity when interest rates are higher than they do today, with rates at rock-bottom levels.
I’ll grant you that $205,000 a year — the current IRS maximum for what a pension fund can pay a recipient — is serious money in many places. But it doesn’t buy you a rich retirement lifestyle in, say, New York’s Manhattan, where $205,000 is equivalent to $88,000 in Manhattan, Kans. The Manhattan-Manhattan distinction, from Money magazine’s cost-of-living calculator, is an example of the difference between being rich statistically and being rich in reality.
Second, I can’t get past Obama’s wanting to limit savers’ tax-favored accounts to only about half the value of what he stands to get from his post-presidential package. Based on numbers from Vanguard Annuity Access, I value his package at more than $6.6 million. (My calculations are at fortune.com/sloan.)
That’s right, $6.6 million. And that doesn’t include the IRA into which Obama has been socking away the $50,000-a-year maximum contribution, using money from his book royalties. Or the $18,000 (plus cost of living) a year he will get at age 62 for his service in the Illinois Senate, or any other benefits he or his wife may realize from past or future jobs.
Because Obama will be only 56 when he leaves office, his annual pension — which by law equals the salary of a Cabinet secretary, now $200,000 — would be worth $3.86 million at today’s annuity rates. The inflation adjustment — when Cabinet salaries rise, a president’s pension rises — is worth at least $770,000 more. His personnel allowance — $150,000 a year for 21 / 2 years, then $96,000 for life — is worth $1.98 million. Total: $6.6 million.
I’m not begrudging Obama his benefits, which are exactly the same as what other ex-presidents get. I’m trying to put his retirement-account proposal in perspective. If Obama feels so strongly about denying tax deductions to people like himself with “excess” benefits and to their employers, he can write checks to the IRS and Illinois for what he has saved by deducting his IRA contributions. But I won’t hold my breath waiting for that to happen.
Yes, there are retirement-account abuses. It’s unconscionable that people like Mitt Romney — remember him? — end up with eight-digit retirement accounts by stuffing them with assets (such as stakes in leveraged buyouts) that have low starting values but massive upsides and are available only to the elite. Then, they reinvest the proceeds in similar, non-publicly available assets. But that abuse is easily solved. To set up a whole new bureaucracy to monitor the value of everyone’s pension and 401(k) strikes me as a vast overreaction.
Although the proposal to limit retirement accounts is unlikely to become law, I don’t like the principle of it. We should be encouraging people to save more for retirement, as parts of Obama’s budget propose, rather than penalizing “the rich” (as Obama defines them).
The White House declined to comment. But to me, this is all really simple: Limiting tax-favored retirement assets of people who have saved all their lives to about half of what taxpayers will give Obama for eight years in office is just wrong. End of story.
Reporter associate Doris Burke contributed to this column.