Tyler Cowen Enters the Lists for the Social Security Debate...
Add-on or carve-out? Tyler Cowen takes a stand on the Social Security private accounts debate, and says "some of each":
Universal 401(k) Accounts Would Bring the Poor Into the Ownership Society - New York Times: Of the current proposals to address income inequality, the universal 401(k) is the most likely to bring general prosperity. The core idea is simple. The federal government creates tax-free retirement accounts for lower-income Americans, supplementing private accounts where they already exist, and matching personal contributions to those accounts. The amount of the match would depend on the income of the family and how much they save.
Gene B. Sperling, senior fellow at the Center for American Progress and the best-known proponent of this idea http://americanprogress.org/issues/2004/01/b289151.html, calls for a mix of 2-to-1 and 1-to-1 matches, but of course the exact ratios depend on what we are willing to spend. Just as the earned-income tax credit pays poor people to work, the universal 401(k) would pay poor people to save. The idea is to bring the benefits of markets and investing to the poor. An H&R Block study ("Saving Incentives for Low- and Middle-Income Families: Evidence From a Field Experiment With H&R Block," by Esther C. Duflo, William G. Gale, Jeffrey Liebman, Peter R. Orszag and Emmanuel Saez, published in _The Quarterly Journal of Economics in November) indicated that lower-income Americans have a strong demand for easy-to-use matching retirement accounts. But currently only 55 percent of Americans working full time hold a job with a retirement savings plan; the rate is even lower for part-time workers and the poor. Thus the bottom 60 percent of taxpayers receives only 10 percent of the tax incentives for savings.
A universal 401(k) plan would spread these tax benefits more evenly and induce more Americans to save. As in current 401(k) plans, the assets would be protected from creditors, the account would be attached to the individual and thus be portable, and penalties would discourage early withdrawal. By directing the benefits toward the neediest, the universal 401(k) savings plan tries to increase economic security in a cost-effective manner. There is an obvious way to pay for a universal 401(k) plan. For every dollar spent on the universal 401(k), the federal government could spend one dollar less on Medicare and Social Security benefits....
America would move closer to President Bush's vision of an ownership society, while addressing income inequality. The poor get more upfront, and their longer-run gains are greater through the returns on induced savings. Historically, equity returns have far exceeded what banks pay on checking accounts, yet many lower-income Americans have little or no investment in the stock market....
The catch is this: the universal 401(k) plan would split the poor into two classes. The first group would allow savings to accumulate and reap the wonders of compound returns for their old age. But other low-income recipients would undermine the intent of the plan. Either they still would not save or, as the government added to their accounts, they would borrow more elsewhere or behave more irresponsibly toward their future in other ways. Their net positions would not much improve. The uncomfortable truth is that many of the most effective antipoverty measures leave more than a few people behind. A leveraged antipoverty plan offers incentives for the poor to change their behavior in a favorable manner; for these incentives to matter, it has to hurt not to save.... A successful universal 401(k) plan would have to be run as a tough-minded investment opportunity and not as a welfare program. It is an open question whether we have the political will to make this work....
A fiscally responsible universal 401(k) plan would not make everyone happy. Libertarians and conservatives would be suspicious of government-created accounts. Liberals might not like freezing or reducing future expenditures on Medicare and Social Security....
Indeed we liberals do not. An add-on, not a carve-out! Raise the money to fund the match for universal 401(k)s by uncapping the FICA tax!
