Jared Bernstein’s blog post last week on “Retirement Insecurity” was an excellent example of misguided economic analysis and commentary. Although he correctly noted that many middle-income workers have small amounts of assets in private savings and pension plans, his policy proposals for encouraging middle class saving were alarming. Tax reform is the most sensible way to encourage saving. All returns on savings could be tax deferred with no penalty for early withdrawals. This would encourage middle class saving not just for retirement, but also for a child’s education, a possible spell of unemployment, and emergencies or other unexpected events.
Bernstein believes that “the way things are currently set up, the marketplace just isn’t providing future retirees with affordable options” because “there’s a real market failure here.” He also argues that Social Security “addresses that market failure” but doesn’t go far enough and advocates further government intrusion through a system “where state or federal governments would set up public pension plans that guaranteed a modest return.” According to Bernstein “a bit of a consensus is forming” for government intervention to form large pools of workers because “as with health care reform, pooling risk is the best way to dilute it.”
The double taxation of saved income is the reason why retirement savings and pension plans are tied to one’s employer. If all savings accounts received the same tax treatment as pension plans or 401k plans there would be no reason for workers to save for their retirement through their employer. If the marketplace isn’t providing future retirees with affordable savings options (something I doubt) it’s probably because of our tax code not a “market failure.” It is irresponsible for Bernstein to allege “market failure” when the low savings rates he describes are the result of government tax policies.
The viewpoints of Bernstein, former Chief economist for Vice President Joe Biden and Executive Director of the White House Middle Class Working Families Task Force, are disturbing because he proposes government solutions for nonexistent problems. Although it is true that pooling risk is the best way to diversify risk one can simply achieve this goal by investing in a variety of stocks and bonds through mutual funds. There is absolutely no reason for either state governments or the federal government to form investment pools for workers. The mutual fund industry is thriving and liquid without this type of government intervention. Middle class workers can easily invest in these funds and would save more if we eliminated the double taxation of saved income.
Bernstein views the Social Security system as a solution to his imagined market failure. Most young people would disagree. They are skeptical that they will receive the present value of the dollars they contribute to Social Security and half don’t believe the system will exist by the time they retire. The Social Security system does not allow children (unless they are disabled) to collect survivor benefits after they reach the age of 18. This means that the adult child of a middle class worker will receive zero if the parent died at age 72 (the average life expectancy of an African American male). At age 72 a middle class worker will have paid over $200,000 into the system over 40 years and collected a small fraction of that in benefits. If left-leaning economists like Bernstein are concerned about low savings rates and the lack of income and wealth mobility for working class families in the U.S., they should favor private retirement accounts as an alternative to Social Security.
Low savings rates and an unequal distribution of financial wealth are causes for concern. Bernstein’s suggestions for more government intervention are misguided. We can encourage middle class families to save more through tax and Social Security reform. This will also reduce inequality in the distribution of financial wealth and make it easier for working class families to transfer wealth from one generation to the next.