This week, Hillary Clinton tossed out a proposal to establish 401(k) accounts for everyone, even for people who don’t have access to one through their employers. She also proposed the federal government provide up to $1,000 in matching funds for each account. This may be a good idea, or at least one that is no zanier than other government-subsidized savings schemes.
But before we start any new program, we need to ask ourselves why we do not trust people to save enough for their own needs.
Consistent libertarians like Milton Friedman or Alan Greenspan probably would see no reason for the myriad savings incentives we already have. (They include 401(a), 401(k), 403(b), 457(b), SEP, SARSEP, Keogh, IRA or Roth IRA plans.) Libertarians and free-market economists view these as unnecessary government regulation of people’s decisions, reducing personal liberty and curtailing efficient allocation of resources. They thus are seen as both unjust and inefficient. If some people fail to save enough and are poor in their old age, that is their own problem, free-market types say. If they run out of money, they can resort to help from family members or private charity.
At the other end of the philosophical and political spectrum is the group that believes government must protect individuals from their own mistakes. Government should provide incentives for people to save, they argue, because people are not smart enough to save what they really need. They will end up being impoverished in their old age because nanny did not properly supervise them. So a wise and benevolent government must encourage them.
Some make a more nuanced argument that parallels the argument for requiring motorcycle riders to wear helmets. Yes, they would say, not saving enough and not wearing a helmet both primarily hurt the person making the decision.
But society is softhearted. If an uninsured, unhelmeted motorcycle rider gets severe head injuries and requires costly medical treatment, we don’t just let him die. Society picks up the cost through Medicaid or unreimbursed hospital charge write-offs. Anyone permanently disabled will get SSI payments, food stamps and other public assistance. If society is going to be on the hook for such expenses in case of injury, it is better off to require riders to wear brain buckets, some argue.
In the same way, if people fail to save enough, we won’t let them starve in the cold. Better to encourage private savings than to have them on the dole later.
Between these two philosophical poles are many people who have never thought much about why government should subsidize private savings. But they don’t want to give up their IRA, their 401(k) or their Keogh, either. They see that these plans reduce their taxes. They don’t ask if we all might be better off if all such programs were abolished.
All these savings incentives are implemented via special tax treatment, usually the exclusion of some income from taxation if put into the right (intricately specified) account. This caters to the widespread self-delusion that subsidies delivered via tax reductions are morally and economically different than subsidies using direct Treasury checks. Economists don’t see any difference.
If we are determined that government must act to increase savings and that the income-tax system is the best vehicle for accomplishing this, there are cheaper ways to do so.
Rather than an alphanumeric soup of overlapping programs, we could simply exclude a flat amount of interest and dividend income from taxation. We could curtail existing programs and allow anyone to exclude the first $2,000 or $20,000 of interest and dividend income from taxation each year.
What economists call the “burden” of existing tax preferred plans is enormous. This refers to the administrative cost to society of the tax feature plus the loss in efficient use of resources because of distorted incentives. We waste enormous amounts on financial advisers, tax-saving books and columnists, training for investment sales staffs, human-resource clerks administering sundry plans and tax preparers filling out additional schedules.
Repeated studies show all this produces little, if any, net increase in national savings. Even if we are just going to spin our wheels, we could do so much more cheaply with a simple exclusion of some substantial threshold amount.
The problem is we don’t trust human beings. We don’t trust welfare recipients to use cash wisely, so we give food stamps and Section 8 housing subsidies. We don’t trust people to save the right amounts for the right reasons, so we write volumes of IRS regulations to make sure that they do.
Instead of adding yet another savings subsidy, let’s consider replacing the ones we already have with something simpler.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.