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The New Independent Party Blog

This Blog is maintained by Mike Barron, Executive Director and Founder of the New Independent Party. The views expressed here are not necessarily those of the Party, its Board of Governors or its Members.

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Plans to Increase Retirement Savings

I have seen a number of proposals lately for increasing retirement savings by creating a form of mandatory IRA. The proposals differ slightly but they have a common set of characteristics. Individuals would be compelled to contribute some amount (typically 5%) of their compensation to a federally managed index fund (that would include fixed income and equity). Low income individuals would either have their contributions matched by the federal government or the federal government would make these contributions for low income people. Proposals for paying for these subsidies vary but a common theme is to increase taxes on the "wealthy." In at least one case this is done by reducing or eliminating tax incentives for "high income" people to invest in IRA's. The theory is that these "high income" individuals will save anyway and the tax incentive is wasted in terms of inducing aggregate net savings.

I have a number of objections to these proposals:

1) I dislike any proposal that compels people to take action. Sometimes this is necessary but we ought not to get into the habit of doing it.

2) As with higher income individuals the savings that this plan compels will displace other kinds of savings for low income people (including the purchase of long-term consumer durables like housing). The net effect on total net retirement savings is likely to be less than expected. It is wrong to think that people who don't save much can't save less, because they can take on debt thereby cancelling out the effect of the savings. In this regard, it is important to remember that a larger proportion of people in the lowest income quintile own their homes outright than do people in the highest income quintile.

3) In the event that there is a significant market collapse, like the one that occurred in 2008, there is also likely to be enormous political pressure to make low-income people whole.

What should we do to increase the savings rate?

We should remove the responsibility for the Fed to pursue full employment (or encourage home ownership) through artificially low interest rates. This would increase interest rates encouraging savings at all levels. In addition, it would lessen the fear of inflation from loose monetary policy, which acts to discourage savings. (Full employment should be pursued through other policy vehicles.)

We should also lower corporate tax rates and maintain very low dividends and capital gains tax rates for low income individuals which will create a market incentive for them to save through purchasing equities. Personal income tax rates and deductions could be adjusted to make these changes revenue neutral.

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