…exceeding $3 million in such accounts is not very difficult for an individual

Greg Mankiw suggests a part of the new budget proposed by President Obama affects 401k and IRA accounts. Some comment in general retirement accounts from AB starts here.

Apparently, President Obama’s budget is going to include some kind of penalty for people who have accumulated more than $3 million in retirement accounts.  The details are not yet known, but I think we know enough to say that this is a terrible idea. A sizable body of work in public finance suggests that consumption taxes are preferable to income taxes.  Completely replacing our tax system with a better one is, however, hard.  Retirement accounts, such as IRAs and 401k plans, are one way our tax code has gradually evolved from an income tax toward a consumption tax.  The use of these accounts should be encouraged, not discouraged.

By the way, exceeding $3 million in such accounts is not very difficult for an individual who is financially successful and frugal.  Under current law, a self-employed person can put about $50,000 a year in a SEP-IRA.  If he does that every year for 40 years, and his savings earn a return of 5 percent per year, he will retire with about $6 million.

 Pro Growth Liberal notes another aspect of Greg Mankiw’s outlook:

Greg explains by noting some folks can readily put away $50,000 a year. The median worker, however, cannot. But there may be something else afoot here as Brian Beutler explains: 

One way experts believe financial managers avoid the current annual contribution limit to IRAs is by using IRAs to participate in investments and assigning those investment interests a nominal value vastly below fair market. 

Brian cites as an example some clever tax planning done by a chap named Mitt Romney.