Arguing against new government inducements to improve retirement plans is an uncomfortable place to be. Who could possibly be opposed to the goal of a comfortable retirement? Who doesn't want to help older Americans achieve that goal? Who doesn't agree that something is terribly wrong when middle-class salaries actually are lower, after inflation adjustments, than they were a decade ago? Surely, we must do something about this.
[See Best Affordable Places to Retire.]
Yet here I am, shaking my head at proposals outlined last week by President Obama's Middle Class Task Force. Here are the four major recommendations, in the White House's own words, pulled from a fact sheet:
- Help Families with Soaring Child Care Costs: The administration proposes to nearly double the Child Care Tax Credit for families making under $85,000 a year; with families earning up to $115,000 a year seeing at least some increase in their credit.
- Helping Families Pay for Care for Elderly Relatives: At the same time, middle class families in the “sandwich generation” – struggling to care for both their children and their parents – will also benefit from new initiatives to support elder care for seniors, and respite for their caregivers.
- Cap Payments on Student Loans: To avoid squeezing recent college graduates entering a tough job market, we will ensure that payments on federal student loans are never more than 10 percent of the borrower’s discretionary income.
- Save for Retirement: The initiatives make it easier to save for retirement with voluntary Automatic IRAs for workers without access to existing retirement plans through their jobs, larger tax credits to match retirement savings for millions of additional workers, and new safeguards to protect retirement savings.
These proposals are a terrible indictment of the private sector's performance in the past decade. They're saying that businesses are unable or unwilling (and there is a huge difference) to provide sufficient compensation to their employees, that our social safety net has been weakened if not shredded for the millions of people who have entered the ranks of the elderly, and that many colleges have gouged students beyond the point of reasonableness.
In the case of retirement, the proposals are saying that the push to privatize retirement security through 401(k) plans and IRAs has not worked. People simply don't have enough money set aside for their retirements, and the picture got a lot worse during the market downturn of 2007-2008. To rectify it, the government would in effect use tax benefits as a form of "match" to encourage people to create new IRAs where they work. The last time I looked, those tax benefits would come out of my pocket, and yours. Even if we accept the notion that a fundamental role of government is to protect its weakest citizens, is this how we should go about it?
[See Best Places to Retire.]
Evidence is overwhelming that employees with access to 401(k) programs do not take full advantage of them. Even employer matches -- essentially free money -- are often left on the table. The investment options within the programs are not well understood. People often make bad investment choices based on poor understanding and little homework. Proponents of behavioral economics prevailed upon Congress in 2006 to enact a law so that employers could automatically enroll employees in the plans unless the employees opted out. It even created default investment choices for employees who did not make these choices for themselves. These new rules have been applauded by the retirement-fund industry and in virtually all of the academic studies I've seen. Yet what they're really saying is that Americans are not capable of behaving like grown-ups when it comes to their crucial retirement decisions. So, government must step in and be the adult.
Now, with what is called, in strained language, a "voluntary Automatic IRA," government is saying the same thing again. While it's true that many workplaces do not offer 401(k)s, there is a wonderful tax-advantaged program that everyone can use, and you don't need to be in a workplace program. It's called an IRA, or Individual Retirement Account. Again, Americans generally have failed to take good advantage of IRAs. In many cases, I'm sure, they didn't have enough money to set aside into IRAs. But in most cases, they didn't use IRAs because they preferred to spend the money today and worry about their retirements later. That's a harsh assessment, to be true, but it's supported by the facts. Congress isn't the only place where people avoid making financially responsible decisions. Spending trumps saving. Credit cards win out over living within one's means.
Today, off course, the consumer economy has largely run out of credit and money. People have been forced to curb spending. Retirement nest eggs have been depleted. Should the government use your tax dollars to help rebuild those nest eggs? Well, it can be argued that this would be a cheap alternative to what will happen when 78 million Baby Boomers hit the retirement wall and run out of money. How much would it cost us to address that calamity? At least the voluntary Automatic IRA is funded with a participant's dollars.
The persuasive logic of the behavioral crowd must also be recognized. People do not behave rationally; tilting the playing field to force them to do the right thing is a pragmatic response. Yet should we accept it as the only solution? it is troubling that we do so little to educate people about how to spend and invest their money. If we did, the voluntary Automatic IRA might not be needed. We would save and invest our money with an eye toward longer and longer retirements as our lifespans grow. We would not need to be taken care of by the government.
Of course, you might say, what's the big deal about bailing out consumers who made poor use of their money? We've already bailed out huge and sophisticated financial institutions. They knew better. And they made poor use of our money.
[See 4 Essential Steps to Financial Reality.]