Critics charge that President Obama’s budget and tax policies target wealth redistribution – social engineering – rather than boosting the economy. His proposal to limit contributions to tax-deferred savings accounts strengthens their case.
In his budget released earlier this month, Obama proposed capping lifetime contributions to 401(k)s or Individual Retirement Accounts (IRAs) at “about $3 million for someone retiring in 2013,” in order to prevent “wealthy individuals” from accumulating “substantially more than is needed to fund reasonable levels of retirement savings.”
This is the same president who said last year, “If you work hard your whole life, you ought to have every opportunity to retire with dignity and financial security….” Obama would like to decide what constitutes dignity and financial security for you.
This particular effort to “level the playing field,” as Obama is so fond of saying, will hit those who work hard, reap the rewards, and save aggressively. It especially sends the wrong message to young people. An analysis by the Employee Benefit Research Analysis suggests that anywhere from 1 percent to 6 percent of workers age 26 to 35 might ultimately hit the cap, depending on investment returns, asset allocation decisions and other variables.
What is the point? The proposal is expected to save the government only $9 billion over the next 10 years – a drop in the budget bucket. This suggestion is not aimed at balancing our books, but at preventing the industrious from getting ahead. This, at a moment when it is clear that the nation should be promoting, and not discouraging savings, when Social Security looks likely to become another welfare program rather than a broad-based retirement account, and when the government boasts about reducing – not adding -- red tape. And when, by the way, young people have been scorched by the financial crisis and are skittish about investing. Young people who live in a time that celebrates conspicuous consumption and not thrift.
The savings rate in our country fell to 2.6 percent in the first quarter of this year, the lowest rate since the end of 2007. This is not good news. Savings provide the capital we need for investment, as well as the monies that Americans need for retirement.
While President Obama was discouraging savings by high earners, he was including suggestions for a National Infrastructure Bank and “Fast Forward Bonds” aimed at leveraging private capital for repair of the nation’s outdated roads and airports.
Does anyone else see a contradiction here?
For decades, policy advisors have been concerned about our low savings rate. Economists Larry Summers and Chris Carroll wrote a paper on the topic for the Brookings Institute in the late 1980s that concluded, “Private saving would probably have been still lower during the 1980s if the federal government had not encouraged saving with new tax incentives.” Incentives such as those Mr. Obama would like to jettison.
Last year, team Obama, noting that 78 million Americans does not have retirement accounts at work--or roughly half the workforce--proposed expanding opportunities for enrollment in 401(k)s and other tax-preferred accounts. They also pushed “making it easier” to save all or some of peoples’ tax refunds and converting unused vacation into retirement savings. In other words – boost savings!
The president’s Council of Economic Advisers last year referenced a study claiming that the share of households at risk of not saving enough for retirement had grown from 31 percent in 1983 to 51 percent in 2009. The increase partly reflects people living longer--that is especially true for women.
The paper also noted that as more retirement assets gravitate to defined contribution plans, as opposed to traditional pension schemes, workers have assumed greater risks. If your IRA or 401k is invested poorly, you will be hurt. Obama’s clamp down on how much can be put away in such plans ignores that increased risk factor.
For successful workers, add to the market risk of IRAs and 401(k)s the prospect that they will likely be stripped of their Social Security benefits. With the Social Security Trust Fund expected to run out of money in 2033, changes are inevitable.
The notion of means-testing Social Security was not original to the Simpson Bowles proposals, but was included therein as one approach to securing the future of the program. Few doubt that ultimately a higher portion of high earners’ income will be taxed and that that group will eventually receive a lower share of benefits.
Since 401(k)s and IRAs are tax-deferred accounts, capping contributions will simply front-end tax payments for high earners and related receipts for the government. If Obama and his colleagues get their way, tax rates will rise over time, especially on our most successful workers. If that happens, the president’s approach could actually end up costing the government.
President Obama is offended by the growing gap between rich and poor, a worrisome trend. His remedy – and seemingly lone economic goal -- is to raise taxes on the wealthy, which this year will be the highest since 1979, when the Tax Policy Center started keeping track.
Taxes on top earners will be even higher yet next year, thanks to Obamacare. Instead of building up middle class wealth through growing jobs and the economy, Obama wants to slash income at the top. This proposal for a first-ever cap on tax-deferred savings accounts is more of the same – meager policy and a bad idea.