The Administration’s Proposed “Pension” Plan: Because What People Want Now is More Ways to Invest in Mutual Funds
Via Lambert, I read that Obama’s pension plan would permit people to have Investment Retirement accounts. Such accounts allow you to invest, tax free, compounding merrily, until retirement.
The budget “lays the groundwork for future establishment of a system of automatic workplace pensions, to operate alongside [ultimately replace?] Social Security, that is expected to dramatically increase” retirement and personal savings, Obama’s Office of Management and Budget said in its outline, without giving details on the costs.
The plan would force employers that don’t offer retirement plans to enroll employees in a “direct-deposit IRA account,” with the option for workers themselves to opt out. Currently, 75 million working Americans, or about half the workforce, lacks employer-based retirement plans, according to the administration.
Now, there’s nothing really wrong with IRAs. But, as Lambert points out, the odd thing is that there isn’t a third option: a public plan you can invest in. Want more social security income by paying more in? Why not allow that as a possibility?
Also, as eCAHNomics has noted, what this plan will do is shift savings from tax paying accounts to non-tax paying accounts. Since the government is thus paying (in reduced taxes), this means overall savings in the economy might actually go down. Which is to say, this isn’t a stimulative change. At best, it’s neutral; at worst, it might even effectively lower overall savings, since government savings would be down.
Fundamentally, though, this isn’t a fix for the problem. Americans already have plenty of options for tax-deferred savings. To the extent that they don’t take them, it’s largely because the American savings rate has spent the last thirty years in precipitous decline, which is because American wages for ordinary people have stagnated. Americans are starting to save more, mind you, but that’s because they’re paralyzed with the fear that they may lose their jobs. That’s exactly the wrong type of savings.
So, color me gray: this isn’t a change that means much of anything. It’s a technocratic fix for a problem that won’t fix the problem it’s aimed at. My suggestions: either just increase Social Security payments (I notice no one is suggesting that), or do things that would increase wages. And if you want to increase savings, perhaps just make sure that consumers have access to savings accounts which pay decent rates of interest, rather than just offering tax-deferred plans.