If the government wants the poor to progress, it should establish a 401(k)-like tax-deferred savings and matching program, according to Tyler Cowen, a professor of economics at George Mason University in
“Just as the earned-income tax credit pays poor people to work, the universal 401(k) would pay poor people to save,” Cowen wrote in an editorial published by the New York Times.
The Pension Protection Act of 2006 will go a long way to increasing the proportion of full-time American workers who have retirement savings accounts from its current 55% level. But it does little for the part-time workers and the poor, the proportion of whom actually have retirement savings accounts is far lower. “Thus the bottom 60% of taxpayers receives only 10% of the incentives for saving,” Cowen wrote.
Cowen cites a study sponsored by H&R Block, and proposals offered by Center For American Progress Senior Fellow Gene B. Sperling, who suggests the government matches savings among qualifies universal 401(k) participants by 2:1 or 1:1, but acknowledges the match would be a function of taxpayers’ willingness to commit. Cowen suggests that for every one dollar spend on the universal 401(k), the federal government could take one dollar from Medicare or Social Security benefits. “The resulting benefit freezes and cuts would apply to all recipients, not just lower-income groups, so the poor would still come out ahead,” he wrote. “Since the reform is revenue-neutral, it would not increase tax rates on the work and savings decisions of wealthier Americans.”
Cowen notes that such programs move toward President George W. Bush’s so-called “ownership society,” and that the increased savings and investment will help the poor in the near-term, and the entire country over the long-haul.
“Perhaps support of a culture of savings and discipline is more important than subsidizing additional savings,” Cowen wrote.
The plan still cannot address the problems of those who continue to borrow or spend irresponsibly, he notes.
“The uncomfortable truth is that many of the most effective anti-poverty measures leave more than a few people behind,” he wrote. “A leveraged anti-poverty 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,” said Cowen.
“A successful universal 401(k) plan would have to be run as a tough-minded investment opportunity, not as a welfare program,” he wrote. That means punishing penalties or even losses for early withdrawal, for example.
Such a plan will be politically divisive, asking Libertarians and Conservatives to accept a more hands-on government, while Liberals to accept cuts to existing aid programs. “But if we are looking for policy initiatives that address real-world problems and offer something to each side, encouraging low-income savings is a good place to start,” said Cowen.
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