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President Obama wants to limit your retirement savings — but not his own

by Allan Sloan     •     The Washington Post

Obama SmirkYou can’t keep a bad idea down. That’s my reaction to a terrible proposal in President Obama’s budget — limiting how much money can be set aside on your behalf in 401(k)s, pensions and other tax-favored retirement accounts.

The idea, of course, is to limit retirement-related tax breaks for “the rich.” The Treasury wants to limit the value of pensions and retirement accounts to about $3.4 million for a married couple, and something less than that (it doesn’t say how much) for single people.

What especially annoys me about this proposal, which first surfaced two years ago, is that President Obama’s retirement package is roughly double the value of the limit the Treasury wants to impose on the rest of us.

But rather than just rant about the unfairness of this, as I did two years ago, I’d like to rant with a little perspective by highlighting two retirement-related budget proposals that — unlike the one I detest — may have a chance of becoming law.

One proposal would allow people with less than $100,000 in their retirement accounts at age 70 1/2 — Treasury says this covers more than half the people with such accounts — to stop being required to take mandatory (and taxable) “required minimum distributions.” People are required to withdraw about 3.7 percent of the value of their account the first year after turning 70 1/2 , and to withdraw increasing percentages as they age. This provision would reduce paperwork for millions of people who are not rich, and also allow them to conserve their retirement accounts until they really need the money.

The estimated impact of this proposal on the federal budget is minuscule — about $40 million a year of foregone taxes. I also like the idea of waiving penalties on long-term unemployed people who take money out of their retirement accounts before turning 59 1/2 . Both proposals are decent and fair.

But I just can’t get over the proposal to limit regular peoples’ retirement accounts to less than half of what U.S. taxpayers are giving President Obama.

The proposed limit on retirement accounts plus pensions isn’t actually $3.4 million — that’s just an estimate based on today’s interest rates. The real limit would be how much it would cost a 62-year-old couple to buy a lifetime annuity that would pay $210,000 a year (the current IRS maximum for what a pension plan can pay a recipient) as long as either member lives. Currently, that would cost about $3.4 million — but the cost will fall sharply when interest rates rise.

And yes, I know that to most people $210,000 a year is a lot of money. But where I live — suburban New York City — that income doesn’t buy you a rich retirement lifestyle. Money magazine’s cost-of-living comparator says that $210,000 in Manhattan, N.Y., is the equivalent of $89,781 in Manhattan, Kan. Would $89,781 make a Kansan Manhattanite rich? I doubt it.

Back when the proposal to limit pensions plus personal retirement savings first surfaced, I got numbers from Vanguard Annuity Access and came up with a value of more than $6.6 million for Obama’s retirement package (see calculations below). Because the Treasury is still using a $3.4 million figure for the limit, I felt no need to recalculate my numbers for the president’s package.

Presidents, by law, get pensions equal to the salary of a Cabinet officer, currently about $200,000 a year. The pension payout would rise over time, as Cabinet salaries do, making it far more valuable than a lifetime $210,000 annuity.

In addition to the unfairness of limiting savings, this proposal would produce a paperwork nightmare. Not to mention the problem of what happens if a married couple goes through a death or a divorce. Or a single person has a late-in-life marriage.

I’m grateful, I guess, that the Treasury’s proposed limit would affect only a relative handful of people. And that the Treasury isn’t proposing some of the sharp reductions that deficit-reduction types want to impose on retirement accounts, such as limiting the total value of employee-plus-employer contributions to such accounts to $20,000 a year, down sharply from the current $53,000.

But I just don’t like this proposal or what it symbolizes. Yes, there are abuses, such as the likes of Mitt Romney stuffing their retirement accounts with assets (for instance, pieces of buyouts) that start out worth little but which have the potential to explode in value.

So if you want to limit retirement-account investments to publicly available, publicly traded securities, be my guest. But don’t limit the value to half of what we taxpayers give our president. That’s just not right.

Below are my calculations about the value of President Obama’s post-presidential retirement package, based on numbers from Vanguard Annuity Access.

Please note that I’m using annuity-cost numbers that I got in 2013, but have calculated the annuity value of the president’s benefits as if he were 56, which he will be when his term expires.

Element 1

A pension equal to the salary for Cabinet secretaries, currently $200,000 a year.

Cost of a $200,000 single-life annuity for a 56-year-old male: $3.86 million.

Element 2

Inflation adjustment, based on Cabinet secretaries’ salary increases.

Since 1995, Cabinet secretaries’ salaries have grown about 70 percent as much as the consumer price index has risen. To be financially conservative, I’ll assume that in the future those salaries will rise only half as fast as the CPI.

Vanguard would charge $5.4 million for a CPI-adjusted annuity, which is $1.54 million more than it would charge for a regular annuity. So I’ll take $770,000 — half the cost of the inflation adjustment — and add it to the $3.86 million cost of a regular annuity, as laid out in Element 1.

Total value of Elements 1 and 2: $4.63 million.

Element 3

Personal staff allowance.

It’s $150,000 annually for the first 2 1/2 post-presidency years, and $96,000 a year thereafter.

A $96,000 single-life annuity for a 56-year-old would cost about $1.85 million. The $54,000-a-year supplement ($150,000 less $96,000) for the first 2 1/2 years is worth another $135,000. Add it up and round it down a tad, and you get $1.98 million.

Total value of President Obama’s retirement package: something more than $6.6 million.

Now, a final element.

If President Obama dies before Michelle Obama does, the payments discussed in Elements 1, 2 and 3 come to an end. However, Michelle Obama would get $20,000 a year for the rest of her life. I can’t begin to figure out how to value this contingent benefit. In any event, it’s not much compared with President Obama’s package. So I’m placing no value on it at all, although it’s clearly worth something.