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Universal 401k accounts
Today's New York Times column is here. Excerpts:
Just as the earned-income tax credit pays poor people to work, the universal 401(k) would pay poor people to save...By directing the benefits toward the neediest, the universal 401(k) savings plan tries to increase economic security in a cost-effective manner.
There is an obvious way to pay for a universal 401(k) plan. For every dollar spent on the universal 401(k), the federal government could spend one dollar less on Medicare and Social Security benefits...
It may seem that what the poor need is more money to spend, but the universal 401(k) plan is taking a gamble by encouraging them to lock up more savings. Perhaps support for a culture of savings and discipline is more important than subsidizing additional spending.
...A fiscally responsible universal 401(k) plan would not make everyone happy. Libertarians and conservatives would be suspicious of government-created accounts. Liberals might not like freezing or reducing future expenditures on Medicare and Social Security. But if we are looking for policy initiatives that address real-world problems and offer something to each side, encouraging low-income savings is a good place to start.
Posted by Tyler Cowen on December 28, 2006 at 06:31 AM in Economics | Permalink
Comments
Oh, that funding plan is really going to fly. Take money from politically powerful middle class retirees and give it to politically powerless poor people. What chance do you suppose that has of passing?
And even setting aside political realities, Prof. Cowen's funding plan seems to be working at cross-purposes with the idea of a Universal 401K. If the money taken from SS and Medicare is done by means-testing, as I'm sure Prof. Cowen would advocate, we've effectively put a tax on saving for retirement.
So on one hand, we're trying to encourage people to save money, but on the other hand we're discouraging it by making retirement benefits contingent on NOT saving.
Posted by: the other brock at Dec 28, 2006 8:45:23 AM
And why the cuts in SS and Medicare?
Once upon a time we wanted pensions for as many Americans as possible PLUS SS and Medicare.
Now only the executive class and government employees seem to have stable pension plans.
This has potential but needs work.
Posted by: save_the_rustbelt at Dec 28, 2006 9:06:45 AM
Tyler:
Why would you suggest that libertarians and conservatives are against such a plan? Wasn’t it George Bush that proposed this plan? The alternative is social security and social security is the opposite of an “ownership society”.
Save the Rust Belt:
Because of overly generous pension plans you rust belt people have been losing jobs by the thousands. And let’s be honest, few private sector employees have pension plans but the vast majority of public employees still have them. We could easily fund Tyler’s and Bush’s ideas, feed the poor and shelter the homeless if we could somehow end public pensions. I know, wishful thinking.
Posted by: Fever at Dec 28, 2006 9:52:51 AM
hi tyler, i'm eric's mom. your column neglects a few things that i would assume(a can opener) an economist would notice and reflect on. first exactly what income level is "poor?" how much can someone who strives to buy shoes for his kid actually save for retirement? how about universal single payer health care? every other civilized nation enjoys it. right now docs, such as my husband, are so beaten down by the insurance industry that medicare fees are among the best they can hope for. docs are retiring like crazy and newborn ones choose lucrative specialties while abandoning internal medicine, psychiatry, pediatrics...i could go on. universal single payer would solve many of the problems of the working poor. non-working poor and the disabled must make do with medicaid whose substandard fees and hoops to jump through discourage most real docs and encourage phony clinics where medicaid numbers rather than patients are used and abused.
oy, howcome you don't comment on the obscene salaries and bonuses paid to wall street top dogs, healthcare industry captains and the like. someone studies econ for 4 yrs at an ivy school, gets a job at goldman sachs for 145k the first year for "analyzing" stuff. give me a break. that's about what a doctor brings home after 4 yrs of college, 4 yrs of med school, 4 yrs of residencey and maybe 20 years of hard real work.
oh, while bank accts don't pay much, cds, do and many can be purchased for $1000. I have gotten burned in the stock market, i'm glad that kumar is in jail where he belongs even tho he is an alum of my college, which was free when i went there.
what else? the first comment was correct. americans, if indeed not all nationalities, are selfish. they will never support anything to which they have no access. it's not pretty, but it is true for the vast majority of folks with means. there is a house in woodcliff lake with 2 hummers, a yellow and a black and the requisite american flag dragging in the dirt out in front. go ask them to support the"poor." anyway, it is always fun blogviating(a new word i think i am coining. best, sue
Posted by: susan lyon at Dec 28, 2006 9:58:44 AM
Susan,
You can get all the kids shoes you could ever need at any local thrift store for almost nothing.
Posted by: Roy at Dec 28, 2006 10:11:24 AM
there is a house in woodcliff lake with 2 hummers, a yellow and a black and the requisite american flag dragging in the dirt out in front. go ask them to support the"poor."
Why is the American flag "requisite"? And how do you know whether they support the poor or not? Have you checked their tax records on how much they give to charity, or their voting records to see what politicians they have voted for? Are you saying that people who own two Hummers all think and act alike?
Posted by: Hei Lun Chan at Dec 28, 2006 10:42:03 AM
"someone studies econ for 4 yrs at an ivy school, gets a job at goldman sachs for 145k the first year for "analyzing" stuff."
It doesn't work quite like that. Anyone joining an i-bank with a bachelors degree starts as an Analyst, earning a much lower salary. One doesn't get into the six-figures until after one gets an MBA and returns as an Associate. (Though a fortunate few go "direct to associate" without the MBA).
Nonetheless, labor markets being what they are, send a signal loud and clear to bright young kids that med school is a relative waste of one's time and money compared to business school or law school. That might have something to do with the fact that the government has yet to intervene with prices in those industries.
Posted by: Russ R at Dec 28, 2006 11:25:18 AM
Tyler,
I like this idea, but why not suggest that we take the money from worthless defense spending (star wars, bunker busting nukes, NEW and IMPROVED air to air combat planes, etc) instead of chipping away at programs that have tangible benefits that help the poor?
Your column is great and I wish you'd push these programs more. The EITC and the universal 401(k) need to be played up.
Posted by: eriks at Dec 28, 2006 11:26:16 AM
Russ R,
Those salaries ARE available to someone straight out of undergrad in i-banking once you include the bonus.
Posted by: eriks at Dec 28, 2006 11:27:46 AM
Why would you suggest that libertarians and conservatives are against such a plan
Well, I can't speak for conservatives. But I'll weigh in for the libertarians.
Leaving aside the 'taxation-is-theft' arguments which would apply regardless of the
nature of the benefit being provided, there are still problems with providing a
specific benefit (in this case a 401(k) account) rather than simply cash. Basically,
the government is refusing to accept the fact that different people have different
levels of future discounting and is trying to enforce some minimum level of deferred
enjoyment for everyone. Better to let people do as they will with the money, even
if that means living fast and dying young.
Posted by: bbartlog at Dec 28, 2006 11:41:25 AM
What's to stop people from looking at their growing nest egg and figuring they can afford to take on more debt, since they've got all this cash coming to them when they retire? These funds shouldn't be available to purchase a a home, like current 401(k)s).
I don't think the idea is bad, since you have to get it through the enemies of progress, the Congress. But the disconnect I see is that saving isn't an end in itself. Savings fuel the economy. Along with this plan should be more cuts to capital gains taxes. They can easily be afforded, because how much does the government spend to deliver $1 in Social Security or Medicare benefits? And, instead of a static $1, you're actually giving someone young about $6 in future benefits.
Posted by: Matt at Dec 28, 2006 1:08:38 PM
One problem with government-run 401Ks is politicization of the investment choices.
Susan, the meme that wealthy people give nothing to the poor is unsupported -- it's simply something that Everybody Knows. I found the book http://tinyurl.com/yx9jbs fascinating.
-dk
Posted by: Dick King at Dec 28, 2006 1:53:50 PM
Savings fuel the economy.
If savings are inherently good, why not just have draconian laws that force
everyone to save a whole lot?
Actually increased savings make things easier for some people and harder for others.
If I want to save or invest, having a bunch of money chasing income streams or
investment opportunities works to my detriment; the competition drives down the
returns. Good from the perspective of people looking for funding/capital, bad if
you're an investor yourself. In a similar vein, more savings will
encourage growth in capital-intensive industries while hurting companies that
provide consumables with a relatively elastic demand (e.g. I would expect a new
airline to benefit from the cheap money, while a touring rock band would be harmed
by the discretionary income now locked away in savings).
At the heart, the question is still whether government is justified in deciding that some
level of future discounting is too steep and needs to be discouraged. I also see the
shadow of the puritans - I am sure that many people would see greater value in the
tangible products of accumulated capital than in the memories of a concert or a
boozy night on the town. But I would sooner leave these choices to the individual.
As a final point, I should note that if you force a certain level of savings on
people who have little care for tomorrow, you will actually discourage some of them
from working at all, as they won't perceive much value in the part of their paycheck
now going to savings.
Posted by: bbartlog at Dec 28, 2006 4:35:16 PM
Your plan: Get rid of Social Security and Medicare to support a minority of elderly poor people. The existing programs are replaced by a savings plan for purposes of getting more people into Bush's "Ownership Society". Bush has done such a great job with the economy so you sure would want to listen to him. Of course, this is supposed to take care of retirement but leaves a great many problems unresolved:
1. What do you do for those people that retire in a down market or are only able to save a pittance?
2. What do you plan for paying for medical care during retirement? Fidelity estimates that a couple over age 65 will need 200k to pay for their medical expenses above and beyond what is paid for by Medicare.
3. What do you plan for those people who become permanently disabled or terminally ill prior to normal retirement ages?
4. What do you plan for widows and orphans when there is little or nothing in the savings plan?
5. Where do you find the trillions of dollars to run this program as well as supporting those folks who are already receiving Social Security and Medicare?
6. Why do you focus only on the poor or near poor? Remember, the fact that there are Social Security and Medicare is the reason that there are not more poor people.
7. Why do you think something like a 401k plan is workable for the poor when there is no evidence that this works for more than a very small percentage of people (actually, there are no studies that document that 401k type plans work for retirement).
8. What do you plan on doing to prevent financial elder abuse that is all too common even among the wealthy. At least with Social Security, money will continue to come in every month even if some one steals everything else.
Posted by: Roger at Dec 28, 2006 5:48:22 PM
Roger,
I think most of your questions are answered in the excerpt quoted above. People who are permanently disabled or who "save a pittance" would get Social Security benefits just as they do now.
As for whether 401k plans "work" or not, I suppose someone would have to squirrel away a lot of money to live completely off of a 401k plan until he or she dies. But who says a 401k has to cover all of one's expenses following retirement? Many retired people have a large amount of real estate equity accumulated over the years and moving into a smaller apartment or house is always possible once the kids move out. Ultimately, many retired people will not be able to cope with a house with more than one floor due to loss of mobility in any case.
Posted by: Ricardo at Dec 28, 2006 6:39:57 PM
> You can get all the kids shoes
> you could ever need at any local
> thrift store for almost nothing.
more fun facts:
Average estimated cost of raising a kid in the US: $160,000 over 17 years.
http://tinyurl.com/y6sknm
Percentage of American kids living below the poverty line is roughly 18%.
http://tinyurl.com/yb44j9
So either there is a serious issue here, or a large percentage of American parents are truly lame at home economics. Among the major costs of child-rearing are food and housing, which appear to have somewhat more impact on the budget than buying shoes at the thrift store.
Cheers,
Eric
Posted by: Eric at Dec 28, 2006 8:53:49 PM
My MIL has a friend who expected the pension after 25 years w/the company.
The husband died at 24.6 months. No pension. They had a pension and SS, why should they have saved more?
One reason why college costs are so high? Uncle Sam assumed the risk.
As to universal health care, it works so well (not)for the civilized countries because we assume their military and prescription drug risk.
As to retiring during a down market, make a manditory rule you can be no more than x% in the market after a certain age.
Don't colleges require professors to save approx. 17% of their income for retirement? I read that once on a blog where they were discussing retirement.
And aren't more companies requiring people to opt-out of 401Ks instead of opting in?
And let's face it, IRAs at $3K? What's that? Should have raised it to $10K, but Uncle Sam would lose too much revenue.
Give us the tools and we'll do what needs to be done.
Posted by: Sandy P at Dec 28, 2006 9:00:56 PM
--Why do you think something like a 401k plan is workable for the poor when there is no evidence that this works for more than a very small percentage of people (actually, there are no studies that document that 401k type plans work for retirement).--
That's an odd statement since it's really only been 20 years, I started mine in 1986 when it was 1st available in my company, my generation won't retire for another 15-20 years yet. I've never had a pension at any company I've worked for. I've always assumed the risk.
And my generation had the greated boom market this country's ever seen.
Posted by: Sandy P at Dec 28, 2006 9:05:49 PM
Susan, the meme that wealthy people give nothing to the poor is unsupported -- it's simply something that Everybody Knows.
Dick,
After carefully reading Susan's post (a skill which appears to be declining in our speedy times) I do not see where she makes or implies the above extreme strawman-esque statement. I would contest that "everyone knows" that rich people give nothing to the poor, since common sense suggests that many rich people in America pay taxes and that some portion of these funds is redistributed to subsidize the luxurious lifestyles of poor people. Is this not also something that "everybody knows?" Does not "everybody know" about Bill Gates' beneficence towards the poor?
What is surprising is that on occasion poor people have themselves contributed to the well-being of people higher up on the economic ladder, a humble example given below.
http://tinyurl.com/ye9tuh
Posted by: Eric at Dec 28, 2006 9:17:03 PM
Susan,
"WAGE GRUMBLES?" (Credit to Prof.D.H.Robertson for this).
Posted by: Samy at Dec 28, 2006 10:24:59 PM
My MIL has a friend who expected the pension after 25 years w/the company.
The husband died at 24.6 [years?]. No pension.
!!!!
I want to see the union that negotiated that pension...
If my company pension had zero vestiture until 25 years, and stopped counting if I didn't work for any reason (like that pension seems to), I would treat the pension's value as zero for purposes of retirement planning. And I'd ask for a different program.
But that's just me.
Before anyone lectures me about hindsight, let me just ask: exactly what kind of standards did workers hold these pension plans to? Let's say I offered these pensions as "employee benefits" in 1950:
1) Pension equal to final salary and indexed to inflation if you work there for 25 years. Nothing if you are terminated before that. Salary can be reduced at the end of your years of service.
2) Pension equal to final salary and indexed to inflation. Inflation index described in reference A if you bother to look it up. Reference A contains an inflation index with one item: the price of CPUs.
3) Generous pension but no rights to access the information about where the money is coming from. OR pension fund is entirely invested in company stock and company bonds.
Would workers have fallen for any of those? Apparently, the answer is yes.
Posted by: Person at Dec 28, 2006 10:51:10 PM
Pensions are no more than promises to pay in the future based on the future earnings of a single corporation.
In the modern economy, corporations (and/or their future earnings) do not last long. Creative destruction happens at a faster pace as technology improves and the global economy becomes more advanced.
On the other hand, you can expect that a HIGHLY DIVERSIFIED collection of ownership interests in the future earnings of MANY companies (i.e. stock mutual funds) will generate reasonable returns over the long term (i.e. a period longer than one business cycle, >10 years).
Posted by: Mr. Econotarian at Dec 28, 2006 11:14:42 PM
If your pension doesn't kick in until 25 years and your family is counting on it then you should buy life insurance.
Posted by: Jacqueline at Dec 29, 2006 12:03:32 AM
The funds in the subsidized 401k accounts are not really private and are in danger of the government claiming controls over them. Furthermore, if these accounts are subsidized the government then begins indirectly buying parts of private companies (via trillions of dollars in stocks within the accounts) and this then opens a path for more government regulation of businesses. So I oppose any regular payments by government for long term funding of 401k-like savings accounts.
To help the poor, it is better to provide subsidies via Health Savings Accounts on an annual basis. This gets around the huge build-up of long term savings that is partially government funded. For a comprehensive reform plan along this line of thought follow the links starting here: http://nospeedbumps.com/?p=1170
Posted by: Dan Morgan at Dec 29, 2006 12:18:32 AM
You're going to propose government-funded retirement accounts for people who don't use banks? If they can't figure out how to use a savings account, how the hell are they going to figure out a government 401(k)?
- Josh
Posted by: Wild Pegasus at Dec 29, 2006 12:19:53 AM
