401(k)

So, unless you’ve been living in a cave, you’re probably aware that currently a “credit crunch” and the global economy is reeling.  A few pundits have been opining about how global economic woes are in no small part the result of reality setting in on an American society that has been too reckless in its spending, and which has abused the credit it has had available. 

I wouldn’t be at all surprised if a few policy makers start remembering old calls to stimulate saving and investment by Americans, or at least shift disposable incomes away from wasteful spending.

In most cases, I’d have to resist such calls, just as I resist too much government intervention on folks’ personal lives.  Living in a free society means having (within reason) the power to make individual decisions, which comes coupled with the responsibility of accepting responsibility for mistakes one makes.

However, that doesn’t necessarily mean that government can’t or shouldn’t assist citizens by empowering them or even incenting them to make responsible decisions.

We actually try to do that today when it comes to savings.   There is an alphabet soup of vehicles that seek to empower and encourage saving for specific purposes, frequently with tax deferment as an incentive.

We have 401(k)’s, IRA’s, Roth IRA’s, Roth 401(k)’s all available as vehicles to save for retirement.  There are an assortment of programs by which money can be stored away to fund future education.  Many Americans can, through their employers, gain access to special tax-advantaged saving accounts to fund future medical expenses.  And, of course, insurance products are available to provide protections such as income in the event of long-term disability.

Many people take advantage of these programs.  A surprising number do not.

I hypothesize that a reason that folks fail to participate, or at least participate in a suboptimal manner, is that for Americans of modest means, their income is limited enough that participation in designated saving programs becomes a set of “either-or” decisions.  As in, “I have a spare $150 from my paycheck.  Do I put it into my 401(k), or do I put it into a medical saving account?”

I wonder if better participation could be achieved if we didn’t have so many alphabet-soup saving vehicles, each limited to specific purposes.

Why not have one generic tax-advantaged savings account, which can be drawn  upon to provide income in the event of retirement, disability, or unemployment, to pay medical bills, to pay for education expenses, and even to help fund a down-payment on a first home?

It’s great that the government tries to encourage people to save for various purposes.  However, I believe that if low- or middle-income Americans didn’t have to worry about earmarking their limited savings to specific purposes, program utilization would increase.

Seen in the New York Times:

Senator Hillary Rodham Clinton of New York unveiled the second biggest domestic policy idea of her Democratic presidential campaign today, proposing to spend $20 billion to $25 billion a year to create 401(k)-style retirement accounts for all Americans and provide federal matching money of up to $1,000 to middle-income people.

Under the plan, the government would give a dollar-to-dollar match for the first $1,000 saved by Americans who earn up to $60,000 annually. For those who earn $60,000 to $100,000, the government would provide a 50 percent match, or $500 for the first $1,000 saved.[...]

My initial reaction to this was that this is an IRA plus a federal match. I’m OK with the idea of incenting folks to save more, but I’d prefer to see it structured via tax credits or deductions, rather than as an explicit, entitlementesque handout, but I do have to admit that it’d be the same.

Supposedly, the funds for the handouts would come from not fully phasing out the estate tax. I’ll give Hillary credit for trying to demonstrate fiscal responsibility with that statement, but I would be remiss if I didn’t point out that Washington has a bit of a problem with spending money it doesn’t have, and such creative accounting ought to be addressed before…or at least in conjunction with…contemplating new social expenditures.

I’m also a little disappointed that this would seem to add to the alphabet soup we have of tax-advantaged specific-purpose savings mechanisms in this country. One of the challenges for lower and middle income folks who want to use such advantaged plans is the whole process of allocating limited savable funds to specific needs.

I’d much rather see a clean-up of the alphabet soup down into one catch-all tax-advantaged savings plan, for use for retirement expenses, income replacement in the event of unemployment or disability, major medical expenses, education, etc. Let folks of modest means work on attempting to save what they can, and spare them the hassle of a financial planning exercise every time benefits enrollment comes around at work.

And perhaps there is some hope for my dream. Quoting from the same NYT article:

Mrs. Clinton said that Americans could also tap into the savings accounts to buy a home or pay for college, and that she was considering allowing workers to access the account “during tough times, like an illness or accident.”

It’s a start.