Sunday, October 02, 2005

An Unnatural Disaster

There are few things more unseemly than watching an elected official pander to his or her constituency – unless it’s an elected official who has made a political misstep trying desperately to get back on the right side of the issue. Far be it from me to disparage the motivations of all the political responses to the devastation of Hurricane Katrina – but surely some were of dubious origins.

There were, of course, many well-intentioned and truly helpful responses, and surely Katrina – and more significantly, the flooding that followed – was a disaster of historic proportions, at least on an aggregate level. Still, I was stunned to watch the Internal Revenue Service and Department of Labor jump into assistance mode, dramatically lowering barriers to the withdrawal of retirement savings in response. With the stroke of a pen, they qualified distributions in the impacted area as hardships, waived the 10% early withdrawal penalty, waived the 20% withholding requirement (but not the eventual payment of taxes – who are we kidding?), doubled the maximum amount available for a plan loan (to $100,000), and liberalized the repayment schedule on those loans.

No doubt the extent and expeditious nature of the relief will be appreciated by those in the disaster area, and certainly there are those who desperately need the help. Moreover, unlike the mammoth amounts of government aid and assistance already targeted for the area, this relief is funded by the very pockets of those impacted by the disaster.

Of course, while the breadth of the disaster may have been historic, the depth wasn’t, at least not on an individual basis. Was the loss of a Jefferson City Parish home any more devastating to its owners than one flattened by Hurricane Frances a year ago? What about that tornado that touched down in Illinois last May? The ones burned to the ground by wildfires in California? The fact is, on an individual level, there is no difference in result.

Sadly, in its effort to respond compassionately to the tragedy of the situation, the Bush Administration has, IMHO, opened a potential Pandora’s Box. For just as surely as Katrina’s devastation wrought severe hardships, distributions related to dealing with that kind of life-altering event are entitled to hardship status. But so are those wildfires in California, that tornado in Kansas, that flood in Kentucky.

It’s hard to question the desire to allow those in desperate need to tap all available financial resources to restore their lives, even at the risk of placing their eventual retirement at risk. However, it would be the epitome of shameless political pandering to treat only those in Katrina’s path with that kind of deference, while ignoring those so similarly impacted in other geographic areas (many of whom, it should be added, will receive no assistance other than personal resources).

Personally, I think it was a mistake to liberalize the loan limits, to waive the hardship penalty, and to suspend the 20% withholding. These limits serve a real purpose, and they have been in place for a long time and through many disasters. Having lowered the bar, it seems to me that the Administration has, pardon the reference, opened the floodgates.

- Nevin Adams

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