Bi-Partisan Support for Add-On Accounts Appears Possible

Given this post, it would be hard for me to object to these proposals to boost national saving:

Retirement Reservations - Low Savings Rate Worries Congress, By Jonathan Weisman, Washington Post: ... Out of the Social Security stalemate ... a separate, bipartisan push is emerging to address an issue that is arguably more pressing: the nation's abysmal savings rate, which most economists see as a broader threat to retirement security.  A final House Ways and Means Committee bill on Social Security remains far off, but potential provisions aimed at bolstering the nation's anemic savings rate are coming into focus.

Many of those initiatives will have bipartisan appeal. House Democrats plan to unveil their own proposals this week to boost national savings, said Rep. Sander M. Levin (Mich.), the ranking Democrat on the Social Security subcommittee. … A savings package, which could move on its own or be wrapped into a bill next year to overhaul the tax code, could have significant economic consequences. ... National savings helps to keep interest rates low and to finance business investments that maintain economic growth. … The centerpiece policy of a new savings package, crafted by Republican tax lobbyist Richard Grafmeyer, is an enhanced tax credit to spur savings among low- and moderate-income workers.  Grafmeyer's plan -- under serious consideration by the Ways and Means Committee -- would expand that participation greatly. Workers earning $50,000 or less would open a savings plan with their employer, a financial institution or even a tax preparer such as H&R Block. Those institutions would then match the deposits -- 50 cents on the dollar up to a maximum annual contribution of $2,000 -- and would receive a federal tax credit to cover the cost. By checking a box on their tax returns, these workers could direct their earned income tax credits or income tax refunds into the new accounts as well, under a plan under committee consideration, said Rep. Jim McCrery (R-La.), chairman of the House Ways and Means subcommittee on Social Security. … Another likely piece of the larger retirement security package being drafted by House Ways and Means Chairman Bill Thomas (R-Calif.) would help employers make enrollment in 401(k) plans automatic unless workers choose to opt out. … Virtually every one of these measures is mirrored by a similar Democratic proposal, said Rep. Rahm Emanuel (D-Ill.), a Ways and Means Committee member who has been pushing savings provisions for months. If Republicans are willing to break them out of a private accounts package, there is little doubt they would be approved overwhelmingly.  "You could make progress on this in a New York minute," Emanuel said. "We're getting very close here." … Proponents of Social Security overhaul have not lost hope. …

The two sides may agree on add-on accounts to boost saving, but the long-run goals of the two sides are very different and there are politics in the background to be wary of.  Keep an eye on this.

Comments

[Bruce Webb]

Two issues are in movement around the political/economic firmament. We have a perceived gap in national savings over here, we have Social Security solvency over there. And privatizers are bound and determined to draw them together into a tight double planet revolving around the same center of gravity. But the linkage is totally artificial and falls apart once you introduce the solvent of solvency.

You can argue endlessly whether injecting your dollars into the market via spending vs financing investment via savings has more bang for the buck for the economy at large: you look at Japan and conclude "spend", you look at the US and conclude "save". But neither has any intrinsic relation to the fiscal health of their respective retirement systems.

I am keeping a watchful eye on "add on", because you know privatizers want to make it drift over the line to "carve out". And there remains some sense of paternalistic blue-nosery that insists that saving for tomorrow outweighs providing for your kids today. Underlying all of this is a judgement of whether Social Security benefits in the future will represent a viable floor or not. If so boosting individual savings is a must, if not boosting individual savings is an option that may or may not help the economy as a whole. And there is a big thumb on the scales for the former proposition.

Social Security solvency changes everything. Everything from the effects of tax cuts to current account balances to national savings rates depends crucially on whether the Social Security Trust Fund becomes a net debter in 2017 or remains a net lender. Low Cost is the invisible black hole distorting the whole space/economic continuum. Or if you prefer the invisible hand of Adam Smith is intervening. Perhaps no one is consciously making a bet on a long range drought in the availability of new Treasury bonds but Social Security solvency would go a long way towards explaining the inverted yield curve we are currently experiencing.

[Bruce Webb]

Hmm, proofreading.

"Underlying all of this is a judgement of whether Social Security benefits in the future will represent a viable floor or not. If so boosting individual savings is a must, if not boosting individual savings is an option that may or may not help the economy as a whole."

Just reverse the polarity and this makes sense. Replace the "so" with "not" and the "not" with "so" and coherency and logic are restored.

Damn conditional sentences.

[anne]

Simply cutting the tax rate on interest income to a maximum of 15% as with dividends and capital gains would add to the incentive to save and end the market distortion that currently exists. Also, this would be cheaper. Private accounts in some form added on to Social Security with no cuts made in Social Security benefits would amount to quite an expensive tax cut. But, what the heck, let's all keep cutting taxes.

[anne]

What will happen of course is that added private accounts will be costly and result in growing pressure in future at least for Social Security benefit cuts.

[spencer]

Before we enact more of these "savings account" tax breaks maybe we ought to try to get a better understanding of why 25 years of expanding such programs has been accompanied by falling savings rates.

For all we know maybe tax breaks for savings is the reason savings rates have been falling.

If you can not disprove that statement why should we do more of the same?

[James Kroeger]

Bruce Webb: "You can argue endlessly whether injecting your dollars into the market via spending vs financing investment via savings has more bang for the buck for the economy at large..."

Why do you assume that the dispute cannot be resolved logically?

The argument that the American economy is saving too little money is based almost entirely on the low national savings "rate." Economists who have concluded from this statistic that the American economy possesses inadequate aggregate savings have obviously forgotten the importance of the equation income = savings + consumption.

If we add to this equation the indisputable obversation that nearly all jobs are dependent upon the spending of others, we are led to the key understanding that any economy always has more than enough savings if there is any level of unemployment whatsoever. The only time it becomes logical to argue that more saving is needed in an economy is when all unemployment has been eliminated and hyperinflation is threatening. Only then will an increase in aggregate savings not threaten to increase unemployment levels.

From these fundamental principles, we can see that there really is an optimal savings threshold. It is finally reached when there is no unemployment whatsoever in the economy. Aggregate savings are inadequate if the zero-unemployment-threshold is exceeded (hyperinflation); if there is any amount of unemployment in the economy, then aggregate savings are excessive.

From this, Bruce, it should be rather obvious that "...financing investment via savings" cannot have "more bang for the buck" than "injecting your dollars into the market via spending" in our current economy. Any initiative that increases aggregate savings in our current economy will, all else equal, exacerbate unemployment and reduced output.

Why is it that so many economists fail to see this eclipsing economic truth?

.

[pgl]

Brad DeLong is noting a Martin Feldstein oped that endorses add-on accounts. But let's be careful. The White House and its allies often call their carve-out plan an "add-on".

[james]

help me understand this

h&r block will pay 50cents for each dollar invested in a savings account it manages for a low income person up to $2000

duh? what do they gain by doing this? how does their anticipated rate of return compare to the saver's accrued benefit

seems to me this is another 401k duplication in the name of the so-called "national savings crisis"

seems to me it is just another example of government sponsored products for a hungry segment of the financial industry - which seems to like to lobby for tax policies as a way of creating new products/services

i think we would all be better served if you and other economist-types talked about these things in the language of business maneuvers rather than abstract economic theory

"groups are lobbying congress to create tax policies that would enable creation of new product/service line that is really just another 401k-type vehicle"

[Bruce Webb]

"Why do you assume that the dispute cannot be resolved logically?"

It wasn't me that coined the term "Dismal Science" to describe Economics. When I was a lad it was accepted knowledge acquired through a logical resolution that unemployment and inflation were inversely related. Once unemployment was pushed under its "natural" rate (then set at 5%) inflation was inevitable. On the other hand high levels of unemployment would keep inflation low. They had equations and everything.

But along came 'stagflation'. In the Carter/Reagan years we managed to have high unemployment and rampant inflation. And fifteen or so years later we had Clinton where we managed to have sub 4% unemployment and very low rates of inflation. A fundamental assumption that was built into economic theory and political policy was shown to be empty.

People pay way more respect to 'Logic' than it may deserve. The application of Aristotelian Logic to real world situations has caused as much tragedy as it has clarity. My intellectual roots are in Benjamin Whorf and Ludwig Wittgenstein with a nod to William James, and not in the black or white world of Formal Logic.

I am with Spencer here, show me the money. And oddly enough I am on your side on the pragmatics here. I am just not at all sure we get there via logic.

[anne]

There is no reason to believe a tax advantage for saving will in fact add much or at all to saving given 25 years of history to the contrary. Still, there is no reason those who earn interest income should pay a substantially higher tax rate than those who earn dividends or capital gains. Robert Rubin has worried about this amrket distorting problem for years, so I would prefer a 15% tax maximum for interest income.

[Mark Thoma]

pgl - I covered the Feldstein piece awhile back (when I met with Brad Friday before last he had seen the post and then read Marty's article and we talked about it some. We were both, how shall I say it, surprised). See Feldstein comments .... Off to give a talk on globalization to a group called "Learning in Retirement" so not much blogging activity until later. Ought to be interesting.

[anne]

Forgive a slight difference, but Marty Feldstein constantly disparages Social Security and I am quite persuaded that he has in mind using add-on accounts as a further rationale to cutting Social Security benefits when the costs are totaled. I find no need for such a program, and there will be no lifting of the cap on payroll taxes to pay for it.

[anne]

The quality of posts is simply excellent.

[anne]

Again, do some napkin calculations of the cost involved aqnd you will find add-ons are impossible unless the budget is further crippled structurally or there is a tax increase and there will be no tax increase before the coming election. This is a shell game, with no pea under any shell.

[Mark Thoma]

I appreciate disagreement as I learn a lot from it. It forces me to think hard and either become more sure of myself and my position, or to reconsider. My goal is to get things right and not look too silly along the way, so, I don't mind one bit when people respectfully disagree (okay, maybe a bit, particularly when it's about economics and people you respect a lot, disagreements on opinion are of no consequence, everyone's entitled). I really hope that when I miss things that I don't remain entrenched in my position. Also, more generally, I would love to see healthy debates taking place in comments - my goal for this site is that someday that might happen. Many comments are already really good. Just in the last few days there have been some excellent additions from many different people. That's great.

As a note on this topic, I resisted add-ons mightily at first and wrote Brad DeLong, who was pushing them, a long series of emails asking him to tell me what he thought the market failure was that justified such an interventionist position. I was particularly disconcerted with the opt-out part as it seemed to exploit the existence of large transactions costs for entering financial markets as a small investor. I prefer incentives to forced enrollment. I didn't, and still don't, like the politics either. I don't trust this group to stop at add-ons. In the end, he convinced me, and I came around reluctantly. Mow I do believe there is a market failure in the retirement savings market, but remain open-minded. And all of that is independent of financing concerns.

Here's the other part of the strategy. I think congress will do something. One way or the other they are going to pat themselves on the back when this is all over and tell us what a wonderful thing they did for (to?) us. By pushing congress to add-ons (not me, but our collective effort), I've been hoping they would spend their time working really hard to reproduce something we already have (401(k)s essentially). Then, having reproduced what already exists but given it a new name (add-ons), they could declare victory and we could all rest easier.

If congress is going to do something, this seemed the least likely to be harmful and might even help if done correctly.

[anne]

Mark Thoma

'Now I do believe there is a market failure in the retirement savings market, but remain open-minded.'

Then I am being to much of a skeptic, and as I supported the drug plan addition to Medicare though understanding it was flawed, I would at other times be pleased with an add-on proposal. I am convinced looking at such proposals in themselves. Compromise is always what politics should be about. Fine, there will be other fights to take up :)

[donna]

Gosh, let's see here... the interest on savings is based on the prime lending rate which is being held artificially low... anyone wonder why our savings is low, really?

[Mark Thoma]

donna - why look at the elephant in the room?

[Movie Guy]

James Kroeger,

That was a good post.

Movie Guy

[anne]

Again, though it does not seem to matter to analysts, interest income is taxed at ordinary rates while dividend and capital gains taxes at no more than 15%. Having a saving account or even owning a long term bond fund after 20 years of gains in bonds is now mere foolishness. There is a reason Warren Buffett began to move to public utilities several years ago, and it took little more than a bit of thought to move with him. Stable dividends and capital gains taxed only when shares are sold. Why ever would I use a saving account? There were other dividend plays as attractive and secure. Think Texaco and Exxon and more than 3% dividends a few years ago. Oh well.

[anne]

By the way, I should emphasize that we have passed through 23 years of the finest bull market in long term bonds in the century. For those who knew how to buy long term bonds and understood 25 years ago that the Federal Reserve could and would cut inflation dramatically buying long term bonds or really Vanguard's long term bond funds was a dream investment even though stock indexing still proved superior. Buying Vanguard's long term bond funds at the beginning of 2000 and holding till now has been superb as well. Going forward is another matter, but finding dividend cushioned investments has not been difficult through these 5 years for those who wished the tax advantage and knew bond capital gains could not extend forever.

[Bruce Webb]

Anne has her finger on the pulse and Mark needs to come back to the Light Side.

This is a political and ideological battle and privatizers have to date shown exactly zero signs of wishing to play fair with the numbers. I had a little brush up with Professor Samwick where he blithely assumed a 3.5% payroll gap instead of the (then) 1.89% gap fronted in the Trustees Reports. Both he publically, and Brad via e-mail, pointed me to an even more obscure than normal table in the Annual Report that if you projected 1.6% productivity over the infinite future you would indeed get a 3.5% payroll gap.

Well predicting economic performance in the 22nd century is madness and basing policy on economic outcomes that are synchronous with heat death of the Sun is worse, but it taught me a lesson. If Andrew made it to that obscure table he surely made it to Table V.B1 and simply chose to ignore its numbers Economic Assumptions under the Three Alternatives

These guys know the numbers, they simply refuse to come clean. I am perfectly willing to have a polite discussion about private accounts and asset diversification. But Marty Feldman was flat out distorting the facts and using language that simply is not supported by the numbers. Once these people show a single sign of being honest actors we can talk, but not until then. As a country we have been played by some slick con men and I for one am a little tired of it.
Rock the Vote wants you to Get It Straight

[Timothy]

Bruce, the phrase "Dismal Science" has a rather unsavory history. Thomas Carlyle coined the phrase in response to political economy not making a distinction of productivity based on race, he thought that non-whites were, well, simply inferior and less productive. We call that racism these days. Mark posted a link on this awhile back.

As for these "add-on" accounts: they sound just like a 401(k). Which already exist and are quite easy to participate in. If these add-on accounts are optional, I doubt they'll really accomplish much. If they're mandatory, I think a lot of people are going to be pretty angry. I'm already paying my OASDI and saving 6% of my salary in a 401(k), plus a RothIRA, plus misc. liquid savings for emergency use. I've optimized savings and consumption based on my budget constraint, for some joker in the Beltway to come along and tell me otherwise is downright offensive.

I'm a bit confused as to the nature of the plan because "would open an account" is different than "would be allowed to open an account" and I think that needs a bit of clarification.

[anne]

Since I often talk about bonds, I want to emphasize just how astonishing a bull market we have passed through most recently in bonds. The 5 year return for the Vanguard Long Term Investment-Grade Bond Fund has been 10.9% annually. The return for the S&P Stock Index has been -2.5% annually. This is a stark difference that has persisted from January 2000 till June 2005. An investor who understood the bond market, or really understood Vanguard bond funds which to me is the bond market, has reaped a wonderful reward for saving most conservatively for 25 years. But, where are savings? There will of course be no repeat for bonds from here.