Dear Mr. Berko: 

Our old family doctor is a friend of ours and a really smart guy. He tells us that the Federal Reserve can’t afford to continue buying government bonds, buying mortgage bonds and injecting $85 billion a month into our banking system. He says that the Federal Reserve System is going broke, and he thinks it will happen soon. He also told us that there is a good possibility that the Obama administration will begin to tax pension plans to generate a new source of revenue for federal programs. He’s very serious about this. I told him I’d write to you for your opinion, and he said you would agree. 

H.D., Oklahoma City



Dear H.D.: 

Most docs should stick to medicine, but your friend seems to know what he’s talking about. The U.S. has about $17.5 trillion of debt. Congress must borrow money to pay the interest on the money that it has already borrowed, and we’re still posting budgets with trillion-dollar deficits. Borrowing this money hasn’t been a problem in the past, because sovereign nations such as China, Saudi Arabia and Japan stepped up to our debt plates. But not anymore. Funds such as Pimco, Vanguard and Fidelity were dependable for a few hundred billion a year, while Wells Fargo, Bank of America and JPMorgan Chase were also good for a few hundred billion a year. Now they’ve become satiated with unattractive low rates. Frankly, the only reason the U.S. government is still functioning is that Congress was able to direct the Federal Reserve to purchase between 75 and 90 percent of the government’s newly issued Treasury bonds. But the problem with this solution, in addition to stabbing Paul to step on Peter, is that the Fed is really going broke. And the doc may be as right as a trivet.

But hold your horses, because a knight on a white horse is racing to the rescue, and her name is Alicia Munnell, a woman with whom I tangled over tax policy 18 years ago. The Obama administration is depending on Alicia, an economist at Boston College with whom Barack Obama has become hugging close in the past five years. I first crossed swords with Alicia when she was an assistant secretary of the treasury during the Bill Clinton years and a kissing bud of Hillary Clinton’s. Alicia became a public figure when she proposed her solution, an annual tax on all retirement assets, to finance Hillary Clinton’s failed universal health care plan in 1994. The administration and Congress are looking once again at one of America’s greatest and last nontaxed asset, known as the retirement plan.

The combined U.S. retirement assets (all tax-sheltered pensions, individual retirement accounts, defined benefit plans, defined contribution plans, Roth IRAs, profit sharing plans, simplified employee pension IRAs, government plans and annuity reserves) totaled about $18.7 trillion (that’s “trillion” with a “t”) on Dec. 31, 2012. This Golconda could be a treasure-trove of untapped wealth and a new source of continuing tax revenues for the administration.

And dear Alicia is a vociferous advocate of investing retirement plan money in public education and public infrastructure to increase resources available for future generations. To achieve this goal, she would demand that taxpayers report as taxable income the contributions they and their employers make to their retirement accounts (this includes your IRAs), as well as the annual earnings in those plans, known as the inside buildup. This would be a rich and annual revenue stream. Then, to make up for the government’s not taxing retirement plans in the past, Alicia would have Congress confiscate 15 percent of retirement plan assets. Of course, members of Congress and their 11,000 employees would be exempted – as they will soon be from the Affordable Care Act – and wouldn’t be required to participate in those onerous insurance exchanges. The initial 15 percent tax would bring in an easy $2.75 trillion. And if the average retirement plan earns 6 percent a year, the federal tax at ordinary rates on an estimated $1.2 trillion of income would be about $300 billion. Then, because your contributions and your employer’s contributions also would be taxed at ordinary rates, you’d be looking at some $350 billion of annual tax revenues. There’s a 30 percent chance that this will happen.