President Obama’s proposed addition to our retirement account saving system – the myRA – provides an occasion to evaluate this specific policy and to reconsider our nation’s entire retirement saving system.
The myRA accounts offer low- and middle-class households the ability to save modest amounts on a tax-favored basis, equivalent to that provided by Roth IRAs. The system is designed to be simple and entail no investment costs to participants.
But it comes with a very big string attached: All contributions will be invested in a special government account that pays the same variable nominal return (not inflation indexed) as the Government Securities Investment Fund in the Thrift Savings Plan for federal employees. In other words, the assets placed in myRA accounts will neither be diversified nor protected against inflation.
The president’s initiative also raises some questions about the making of fiscal policy. Although the myRA accounts will likely have a negligible impact on federal revenues, they will have some impact. Isn’t Congress supposed to legislate all matters fiscal?
Also, it’s not clear that the myRA accounts will actually be invested in government securities. If they’re not, they may end up as a form of borrowing by the government that’s off the books. Finally, the myRA accounts permit tax-free withdrawal of contributions at any time. This is better treatment than regular Roth IRAs receive – so the myRA is not simply the extension of an existing policy.
All these quibbles aside, we applaud the president’s concern with Americans’ failure to save. Clearly we face a national saving crisis. Last year, our nation saved only 2 percent of its net national income. In 1950, the national savings rate was 15 percent.
Our six-decade decline in our savings rate has produced economic fallout. Since we aren’t saving, we don’t have the wherewithal to invest. Last year’s net domestic investment rate was 4 percent, far below the 1950 rate, which was also 15 percent. The difference between our saving and investment rates reflects foreign investment in the U.S.
But this foreign investment, which is measured as our nation’s current account deficit, hasn’t been large enough to keep our investment rate from falling, over time, by almost three quarters. Less domestic investment has meant less real wage growth.
Apart from fringe benefits, American workers now earn no more, in real terms, than they did in the imd-60s. Clearly there are many interconnected factors at play here including foreign competition, offshoring, growing wage inequality, and competition with smart machines. Nonetheless, real wages would surely be higher had we spent the last 60 years investing 15 percent of national income year in and year out.
What explains the decline in national saving? Is it the government sector that’s consuming a much larger share of national income? No. Of the 13 percentage-points decline in the national saving rate, only 1 percentage point can be attributable to government. The rest – 92 percent – reflects an increase in household consumption as a share of national income.
So who within the household sector is consuming so much more? The answer is not undisciplined younger generations, but rather the elderly. Over the decades, consumption by the elderly has grown dramatically relative to that of younger people. For example, in the early sixties, 80-year-olds consumed, on average, about two thirds of what 30 year-olds consumed.
Today, they consume over 50 percent more. The explanation lies in a massive intergenerational redistribution from the young, no matter how poor, to the old, no matter how rich, that has been effected over time through the expansion of Social Security, Medicare, and Medicaid, as well as via tax cuts that differentially helped the elderly.
The retirement account system hasn’t overcome the impact of this policy on national saving, nor, given its design, could one have expected it to. True, some workers have had better incentives to save. But the reductions in lifetime taxes and associated increases in disposable lifetime incomes from the plethora of 401(k), 403(b), IRA, SEPs, Keogh Accounts, Roth IRAs … and now, myRAs, have done more to encourage consumption than saving.
They’ve enriched the mutual fund industry, but baby boomers as a group are reaching retirement with far too little overall savings. Many will be wholly or mostly dependent on Social Security, which is 32 percent underfinanced, according to Table IVB6 of its 2013 Trustees Report.
What can be done?
The answer is to think big. We recommend replacing, in its entirety, our employer-based retirement account system with Personal Security Accounts or PSAs. Under this plan, all single workers would contribute 8 percent of their pay to their PSAs. Married workers’ contributions would be allocated 50-50 to their own and their spouses’ PSAs.
The government would make matching contributions on behalf of low earners to make the system progressive. All contributions would be invested by a computer, not Wall Street, at zero cost to account holders in a global index fund consisting of stocks, corporate bonds, government bonds, and real estate investment trusts. The government would guarantee a zero real return on the global index.
At age 60, the same computer would begin gradually selling off each worker’s holdings of the global index, with all holdings sold by age 70. The proceeds from each month’s sale would be spent on Treasury Inflation Protected bonds. The principal and interest from those bonds would in turn be used by the computer to provide inflation-indexed annuities to workers, where the annuity pool would be formed by the individual’s age cohort.
These annuities would be adjusted annually based on the cohort’s projected longevity to ensure that no costs are passed to younger generations.
Personal Security Accounts could gradually replace the retirement portion of Social Security. Alternatively, they could supplement Social Security. Those on the left could view PSAs as a modern form of compulsory saving, while those on the right could label it privatization of Social Security, since the new system would have individual accounts, hold private assets, and trade in global financial markets. So both sides could claim victory – a sine qua non for policy progress.
Our country is in a deep hole. No matter where one looks – at the tax system, at Social Security, at health care, at retirement saving – one sees terrible design crying out for simple, efficient, and low-cost radical reforms. Using Personal Security Accounts to supplement or reform Social Security would help ensure the next generation a secure retirement – something most baby boomers now desperately covet.
Laurence Kotlikoff is Warren Professor of Economics, Boston University, and Director of the Tax Analysis Center. Zvi Bodie is Barron Professor of Management, Boston University.
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