America is Saving Too Much

Apparently that is what the House Democrats in Congress think.

Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

House Education and Labor Committee Chairman George Miller, D-Calif., and Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.

So those who actually save via their 401K will now have less incentive to save.

At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months.

I don’t doubt that this is true and that much of those losses might have occured in the last couple of months. However, I’m not sure this plan is much of an answer. First off, while this would result in more money in the Social Security system it would mean less money in private 401ks. Further, I’m doubtful about the amount of money flowing into Social Security would necessarily offset the losses to 401ks. Yes recently we’ve seen serious losses, but those will likely be recouped in the future.

“I want to stop the federal subsidy of 401(k)s,” Ms. Ghilarducci said in an interview. “401(k)s can continue to exist, but they won’t have the benefit of the subsidy of the tax break.”

What a wonderfully perverse world view. Because something is not taxed it is being subsidized. Never mind that even if we consider this a subsidy it is a subsidy for savings, and long term savings at that when typically in this country savings are taxed.

“From where I sit that’s just crazy,” said John Belluardo, president of Stewardship Financial Services Inc. in Tarrytown, N.Y. “A lot of people contribute to their 401(k)s because of the match of the em-ployer,” he said.Mr. Belluardo’s firm does not manage assets directly.

Higher-income employers provide matching funds to employee plans so that they can qualify for tax benefits for their own defined contribution plans, he said.

“If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets,” Mr. Belluardo said.

There you go, Americans, you save too much. Stop it. Give that money to the government. They’ll take oh so much better care of it than you will. Never mind that right now Social Security is in actuarial imbalance, and lets not talk about the neutron bomb better known as Medicare and that it is several tens of trillions out of actuarial imbalance. You can trust the government, they are here to help you.

FILED UNDER: James Joyner
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research.

Comments

  1. Jeffrey W. Baker says:

    Looks like you’ve got plenty of time on your hands, but not enough to retract your B.S. headline from yesterday.

    I’ve already changed it. If you insist on making further off topic posts in the comments to this post I will delete them.–SJV




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  2. I wonder how they feel about Roth IRAs?




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  3. Steve Verdon says:

    IIRC contributions to those are with after-tax dollars so I don’t think they’d be impacted, but you’d better check that.




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  4. Michael says:

    IIRC contributions to those are with after-tax dollars so I don’t think they’d be impacted, but you’d better check that.

    But interest on a Roth IRA is taxed at a lower rate than a traditional IRA. Charles was probably wondering if the Congressmen are looking to do away with that as well.




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  5. Correct.




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  6. Ugh says:

    What a wonderfully perverse world view. Because something is not taxed it is being subsidized.

    If 95% percent of income is taxed and 5% iss untaxed, the 5% that is untaxed has received a subsidy just as much as it would have if 95% of income was untaxed and 5% was subsidized. A subsidy is a distortion whether it is delivered in the form of special tax treatment or an actual cash payment.




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  7. John Burgess says:

    Would I have to worry about the Secret Service visiting my home if I stated I’d like to see a meteorite take out the entire Congress in one fell swoop?

    If so, then I’m not going to say it out loud, just into a paper bag.




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  8. Steve Verdon says:

    A subsidy is a distortion whether it is delivered in the form of special tax treatment or an actual cash payment.

    Technically the tax is deferred, so really no subsidy save towards early savings which is usually seen as a good thing. As any politician if the U.S. savings rate is too low and most would say yes…then they advocate a policy like this.




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  9. davod says:

    I thought the benefit of the 401(k) was the tax deferment, because it allowed you to keep more money in the account accruing interest.

    PS: It seems clear that the Dems feel they are going to win big, what with Frank coming out with his tax and spend proposals and now this.

    Of course, in the tenor of all those famous Conservatives voting for Obama, we can only hope he has the common sense to veto something that looks like it would be part of his policy, if only he had thought of it first.




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  10. What a quaint notion I have to think that saving money means ‘saving money’. At one time, investing meant ‘investing’. Now in today’s society ‘investing in one’s retirement’ means ‘saving’. I just can’t keep up with the newspeak.
    I think civilizations fall because the language gets so corrupted that no one knows what words mean anymore. Perhaps a corruption of the language reflects a corruption of the society.

    Thanks for reading my lament.




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  11. just me says:

    Seems to me it is time to start running against congress-if Obama is going to win, then the best tack to take is don’t give him a congress full of idiots like Frank.

    And raising or changing the tax structure of savings accounts would have to be one of the dumbest ideas ever.




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  12. DL says:

    The grand design is for the almighty government to capture private 401k monies (Trillions?)and help bail out the soc security system -if we’re lucky. If we’re unlucky, they’ll call it “lock box two” and spend it on social vote buying programs and few will be wise to their conviscation scheme.
    Anyone who can withdraw their funds, probably ought to before Obama stokes it away with a pen – replicas of which will be sent to friends in the Kremlin.




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