By Tom Baxter
When Congress inserted a provision which allowed retirees to postpone taking the required minimum withdrawals from their 401(k)s this year, it seemed at first half-wink like a thoughtful gesture to older Americans.
In retrospect, that small piece of the first huge COVID relief package looks like a microcosm of everything Washington has done wrong in its response to the economic challenges posed by the pandemic.
If they haven’t begun taking money out of their 401(k), seniors are required to begin withdrawals after they turn 70 1/2. That’s so the government can begin collecting the taxes it has been deferring for years from even the thriftiest Americans.
In the early weeks of the pandemic last spring, it was feared the stock market would crash, forcing retirees to cash in their savings at a reduced value. Congress responded by inserting a provision which allowed savers to waive the mandatory withdrawal this year, giving their 401(k)s time to bounce back.
In the first place, the market didn’t crash. Americans’ retirement accounts sagged in the first quarter, but on the whole there was no hit to retirement incomes. If the market crashes next year, as well it might, the people who waived their payments will still see their income reduced.
On a deeper level, even if the market crashed, what sense would it make for someone over 70, living during a global pandemic, to try to wait out the market for a little more income down the line? There’s an answer to that. The only people it makes sense for are those well off enough not to need the income from their 401(k)s as much as they’d like to postpone paying the taxes on it.
At the same time it allowed these over-70 Americans to keep money in their accounts, the Coronavirus Aid, Relief, and Economic Security (CARES) Act made it possible for under-60 Americans who have either had or been affected by the coronavirus to withdraw up to $100,000 from their 401(k) accounts without penalties — in effect, giving financially stressed Americans the green light to gut their life savings. That might be a last resort, but people with 401(k)s already have the option to borrow from their 401(k)s and pay themselves back. That would seem the wiser choice in all but the most dire circumstances.
Together, what these two provisions do is what the CARES Act does in many other ways. They widen the gap, already troubling, between those with the means to play the system and those who are the system’s victims. They encourage those who should be building wealth to spend it, and those who should be spending wealth to hang on to it, thus also widening the gap between young and old.
This should be one of the key issues in the presidential race and every congressional race this year. There should be a broad airing of how $2.2 trillion of our money has been spent in the first wave, and how we got to the current stalemate over the second wave with no overall sense of direction about the economy or the virus.
At least once a day, somebody on television says that the coronavirus doesn’t care whether you’re a Democrat or a Republican, a conservative or a liberal. Something very similar could be said about the stock market, the virus, and Trump.
Stock futures plunged on the night Donald Trump was elected president in 2016, then shot upward the next day upon the realization of what the market could get out of a Trump presidency. When the virus tanked Main Street and Trump’s prospects diminished, Wall Street had some nervous twitches but continued upward. When Trump announced he had tested positive for COVID, the futures coughed a bit, and the next day the markets went… up.
This wasn’t because the markets have soured on Trump. It means that in the market’s more focused view, he’s irrelevant. Like the virus, the market doesn’t care. When it went up after his diagnosis it was really reacting with optimism — short-sided, as it has turned out — to the prospects for passage of a second relief package.
Next year the president and Congress will engage with a nation divided between prosperous “zoom towns” and a less wired America falling even farther behind. The CARES Act has widened that division.
