Government should help poor to save for retirement

Published in The News Tribune December 21, 2010

At a time of year when businesses everywhere are urging us to spend, the bipartisan presidential commission on reducing the national debt and Governor Gregoire’s proposed budget sound like Ebenezer Scrooge.  According to both, saving, not spending, is the order of the day.  One can’t help but wonder what Charles Dickens would say about the new-found cult of “austerity.”


As conservatives will point out, Dickens’ A Christmas Carol extols the virtues of private charity, and wasn’t intended as a guide to government action.   But the basic principle underlying Dickens’ classic is that we all owe a duty to the less fortunate among us.  Sometimes that duty is best performed by means of collective, governmental action. 


At the very least, the government should not pass up policies that could help the poor at little cost to anyone else.


But the presidential Commission missed an opportunity to do just that in its proposal for fixing Social Security.


The dilemma of Social Security is this:  Within a few decades the revenue flowing into the system will not be enough to cover the required payments.  We thus must either cut benefits, find additional revenue, or combine the two.   The bottom line for any reform should be that it protects the pensions of the most unfortunate among us. 


On this point, the Commission’s plan is not that bad.  First, it reduces everyone’s benefits by slowing cost-of-living adjustments and increasing the age at which we’re eligible for a full pension.   Second, it increases the amount wealthier individuals will pay into Social Security.  Finally, it restructures pensions so that those to the wealthy decrease and those to the poor increase. 


A good starting point.  But we should keep in mind that Social Security has always been meant to supplement citizens’ other sources of retirement funds.  For low income workers, Social Security provides about $10,000/year — not enough to get them over the official poverty line.  But these retirees as well as almost half of all retirees rely on Social Security for roughly four out of every five dollars of post-retirement income.   For many, then, the premise that Social Security is a supplement just doesn’t hold. 


We could of course beef up the size of the government’s pension to low income retirees.  This is what other rich countries do:  On average they provide their low income citizens with about 50 percent more retirement income than we do.   Or we could follow in their footsteps by providing greater income support.  Yet these policies are partly responsible for the budget problems plaguing European nations; and anything that increases our own budget woes during these austere times is a non-starter.


But here’s what we can do that wouldn’t be all that costly:  enact policies to promote savings and asset accumulation among low and middle income citizens.   In addition to low income, a lack of savings is what explains why too many citizens reach retirement without a nest egg to supplement their Social Security check.  


The federal government already has loads of policies that promote wealth accumulation.    Think of the home mortgage deduction, the favorable taxation of capital gains, and tax breaks for contributions to retirement or college savings plans.  But these policies, which collectively total  hundreds of billions of dollars in subsidies, are not targeted to those at the lower end of the income distribution; over 90 percent of these subsidies to wealth building go to those in the top half of the income distribution.   Not surprisingly, these citizens already own over 95 percent of the nation’s wealth.   Current subsidies thus encourage wealth accumulation among the wrong people.


We know from demonstration projects that given the right support, those with even very low income can and do save.  Through tax credits and other forms of government subsidies, it is possible to get low to moderate income households to build up assets.   By doing so during their working life, citizens gain the ability to plan, respond to emergencies, and pass on opportunities to their descendants – in addition to retiring with greater income security.


Promoting saving among poorer citizens is an idea that all Scrooges should like.