A 401(k) For All (Demo)

On July 22, 2014, Gene B. Sperling writes in The New York Times:

ONE compelling way to turn the ongoing national discussion on wealth inequality into a tangible policy to help Americans increase their wealth and savings would be to fix what I have long called our “upside-down” tax incentive system for retirement savings. In its current form, it makes higher-income Americans triple winners and people earning less money triple losers.

How so? First, the federal government’s use of tax deductibility to encourage savings turns our progressive structure for taxing income into a regressive one: While earners in the highest income bracket get a 39.6 percent deduction for savings, the hardest-pressed workers, those in the lowest tax bracket, get only a 10 percent deduction for every dollar they manage to put away.

Second, while less than 1 percent of lower- and moderate-income Americans can put aside enough to fully “max out” their benefits on I.R.A. contributions, higher-income Americans can maximize their return on savings by sampling from a menu of tax-preferred savings options. A business owner could theoretically benefit from a 401(k), a SEP I.R.A. of up to $52,000 and a state-based 529 program that allows tax-free savings for college education.

Finally, a far larger share of upper-income Americans get matching incentives for savings from their employers. Members of Congress and the White House staff, for example, get an 80 percent match for saving 5 percent of their income. But while half of Americans earning more than $100,000 get an employer match, only 4 percent of those earning under $30,000 and less than 2 percent of those making under $20,000 get any employer match for saving.

The results are stunning. Last year, of the $137 billion in tax benefits that went to encourage retirement savings, three times more went to the top 10 percent of taxpayers than to the bottom 60 percent. The top 5 percent of taxpayers get more tax relief for savings than the bottom 80 percent. If the main justification for savings incentives is to help workers overcome shortsightedness about the benefits of long-term accumulated savings, how is it defensible to focus so many of our resources on those best poised to save anyway?

One intermediate step would be to replace our regressive system of relying on tax deductibility with a flat tax credit that would give every American a 28 percent tax credit for savings, regardless of income. But why should we stop there? If we know that 401(k)’s with automatic payroll deductions and matching incentives work beautifully for those with access to them, why would we not institute a 401(k) for everyone?

A government-funded universal 401(k) would give lower- and moderate-income Americans a dollar-for-dollar matching credit for up to $4,000 saved annually per household. Upper-middle-class Americans could get at least a 60 percent match — doubling the incentive they get today. The match would be open to workers even if their employers were already matching, which would encourage employers to keep contributing to savings. The match would also be available through I.R.A. contributions for those who were self-employed or who wanted to keep saving even while they were temporarily not working.

Employers would have to provide automatic payroll deductions for their employees (while allowing those who still wanted to opt out to do so). Setting the default at “opting in” would ensure that workers did not miss out on the match provided by a universal 401(k). The government could set requirements for low fees, transparency and safety to allow for vigorous competition in the private sector while allowing individual savers access to a version of the plan that members of Congress use for their own retirement savings.

Costs need not be a roadblock. Among many ways to do it, moderate reforms to the estate tax could allow married couples to leave up to $7 million to their heirs tax-free (instead of the current $10.7 million) while generating over $200 billion in resources over the next decade, which could be used to help tens of millions of savers build their own estates. Even if a universal 401(k) ended up costing the government more than expected, it would still increase national savings overall if the public incentives led to additional private savings.

While President Clinton put forward a similar USA Account proposal in 1999 and President Obama has promoted automatic savings proposals since 2009, these ideas have gotten lost in partisan debates on fiscal and Social Security reform.

But with the economy recovering and many Americans beginning to focus on rebuilding lost nest eggs, politicians on all sides should see something they like in a policy that would both reduce wealth inequality and encourage individual wealth creation.

Instead of a focus on “past savings” and depletion of monthly wage earnings through contributions to 401(k)s, we should create equal opportunities for EVERY child, woman and man to build a wealth-creating, income-producing Capital Homestead Account (CHA) using the financial mechanism of insured, interest-free capital credit local bank loans backed by the Federal Reserve that would be repayable out of the FUTURE (“future savings”) earnings of the capital asset investments, without requiring a reduction in their consumption income, and without taking anything from those who are already in the wealthy ownership class.

http://www.nytimes.com/2014/07/23/opinion/a-401-k-for-all.html?smid=fb-share&_r=0