Private retirement accounts

Yes, let’s have them, but not as part of Social Security. Instead, let’s spend the tax subsidy on IRAs,401(k)s, and the like to fund individual retirement accounts for every worker.

Steve Teles writes:

I was reading an article by that wizard Kevin Hassett (he of Dow 4 million or whatever) complaining that lots of other countries (including Mongolia) have individual accounts in their social security systems, and we don’t. Thus the Democrats’ resistance to individual accounts puts them to the left of the Mongolians.

But, of course, what Hassett ignores is that we currently spend about $160 billion a year subsidizing 401ks, IRAs, etc. This is, in effect, the “private” component of our pension system. Unfortunately, this huge expenditure does just about nothing, as far as we can tell, to actually increase savings, because it is terribly targeted, and thus goes to individuals who would probably save anyway.

In addition, the crazy-quilt form of the current subsidy creates very large dead-weight costs, due to the tax planning that’s required to administer the system (both at the individual level, and due to staffing at the business level). Most of these costs are off the books, but they are still real costs.

The real kick from savings incentives comes from those who do not currently save now, and they are disproportionately down the income scale. If you assume that we have about 150 million people currently in the labor force, that means that we have an average subsidy per worker of about $1000 a year.

Imagine what would happen if we made this into a flat subsidy, so that everyone got $1000 in an individual account (preferably invested in something like the federal government’s Thrift Savings Plan, to keep costs down). There is almost no question that net savings would go up, because a large part of the subsidy would be going to people with zero (or negative) savings today. In addition, of course, you’d be moving from a highly regressive system to one that was progressive. Administrative costs would drop considerably.

Such a system might be used to leverage additional voluntary savings out of current income, especially if you created a default system of tax withholding for the accounts (so that everyone would contribute some percentage of their earnings, unless they opted not to). We know from behavioral finance research that such a system dramatically increases contributions in private pensions.

The politics of this would be very complex, because there would be substantial losers: the mostly-prosperous folks who now get huge tax benefits from retirement accounts. But this would seem like the direction that the Democrats should be going, to respond to the administration’s “ownership society” rhetoric–it makes a lot more sense to try to increase savings by fixing the tax-subsidy system, which is broken (both in equity and efficiency terms) than by monkeying with the Social Security system, which is working tolerably well.

In addition, the politics of this might not be so bad, since the benefits would be very clear–everyone gets $1000 tax credit right into an individual account–while the costs would be variable and not wholly transparent.

This seems to me like a major idea, both substantively and politically.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com