apocryph.org Notes to my future self

When Supplementing Social Security, "Simplicity Trumps Choice"?

I just read Rahm Emanuel‘s WSJ editorial, Supplementing Social Security (probably available only to WSJ subscribers). As one would expect from an editorial written by the head of the DCCC, it’s the usual populist rhetoric, but a few things struck me as particularly disquieting.

The gist of the editorial is that:

• The US savings rate is disturbingly low (as in, Great Depression low)
• Despite tax incentives for savings over the years, savings rate is still low
• A higher savings rate is desirable
• Insert regulation and income redistribution programs here

Here are the details, and some comments:

Every American who works ought to have the chance to save. But today, too many don’t. An estimated 75 million working Americans — nearly half the work force — lack access to an employer-sponsored savings plan that helps put away money for retirement. At the same time, too many who have access to a savings plan contribute too little or don’t participate at all. In addition, Americans don’t start saving early enough. The typical American starts working at age 22, but on average, most do not begin to participate in an employer savings plan until age 41 — losing 19 years of savings.

It’s not accurate to suggest that many Americans don’t have the ‘chance to save’. Perhaps many don’t have access to a 401(k) (including me, as it happens). That doesn’t mean there are no chances to save. Traditional and Roth IRAs come to mind, as well as after-tax options like brokerage accounts. For the young and healthy, HSAs are also a handy way to accumulate pre-tax savings.

What it comes down to really is the second point, which is that many Americans contribute “too little” or nothing at all to their savings programs. Despite continued tax breaks and other incentives, not to mention self-interest, lots of American workers don’t have any/enough money. Whatever can we do? Keep listening.

In the last Congress, I proposed legislation that took a different approach. Instead of offering a new tax subsidy, my proposal helped companies automatically enroll employees in their 401(k) plans, rather than relying on workers to fill out the forms necessary to participate in a plan.

The Pension Protection Act of 2006, signed into law, included my proposal and it is working. According to a recent survey conducted by Hewitt Associates, it is likely that one out of every two companies that offer a 401(k), or similar plan, will automatically enroll new employees. If we make saving simple by limiting the amount of time, effort and decisions that people have to make, we can dramatically increase the number of people who save. In short, simplicity trumps choice.

Brilliant. Work around the apathy and laziness of American workers by automatically enrolling them in a 401(k). As long as there’s an opt-out I don’t have a problem with this idea, though I am skeptical that our appalling savings rate problem is largely caused by laziness and aversion to choice so I’ll be surprised if it solves the problem.

However, this one-liner really says it all: “simplicity trumps choice”. As an expression of market preferences, I’m afraid that’s often true. Coming from a Federal government politician, it’s downright scary.

Building on the principles of personal accounts, universal savings and the desire in the marketplace for simplicity, I believe we should create Universal Savings Accounts. Like 401(k)s, the accounts would supplement Social Security. Employers and employees would contribute 1% of paychecks on a tax-deductible basis. Additional contributions could be made to the accounts at the discretion of the company or individual worker.

Sounds ok I guess, but what does this imply? Are USAs mandatory for employers? Is this another 1% ‘tax’ on labor? If you opt out of the plan, what happens to your employer’s 1% contribution? Are you leaving money on the table?

To ensure low management fees, these accounts would be managed by the private sector but overseen by a quasi-public board that would be given fiduciary responsibility for the types of investment options that workers could select.

Ugh. Government mandated, government regulated savings accounts, with investment options dictated by government bureaucrats. Anyone want to guess how long before this ‘quasi-public board’ becomes highly politicized?

Since low-income workers have the hardest time saving for retirement, we should provide an additional incentive to participate by strengthening the Saver’s Credit, a federal tax credit that matches savings put into retirement accounts.

Ah. There it is. Money taken by threat of force by the federal government from workers like me will be given to workers with lower incomes to double their retirement savings. This on top of the money already taken from me and put into a government slush fund, jokingly referred to as ‘Social Security’, to be used to pay for my grandparent’s retirement and whatever other spending programs 535 spendthrift politicians can come up with.

I believe that this type of approach — one that combines the goals of personal accounts, universal savings and the consumer’s desire for simplicity — is a necessary pre-condition to reforming Social Security. Both President Clinton and President Bush have waded into the Social Security reform debate and have nothing to show for their efforts, in part because they put the cart before the horse.

Only, this isn’t social security reform. Social Security stays where it is, government power grows a little more, employers’ regulatory burden increases, and poorer people get more of my money. If the suggestion was ‘get rid of Social Security and replace it with this quasi-free market scheme’ I’d be all for it, in the interest of incremental improvement. As an addition to Social Security, though, it’s just another wealth redistribution scheme.

The lesson that should be drawn from their experience is twofold: Americans are anxious about their financial future, and the American people like the security that comes with Social Security. In order for us to tackle the problems of Social Security, Washington must provide solutions that make the American people feel more financially secure. If this anxiety is not addressed first, neither party will be given the opportunity to constructively address the challenges facing Social Security.

I suspect Emanuel is right that “[a large number of] the American people like the security that comes with Social Security”, which is an indictment of the collective American financial aptitude if ever there was one. Where else can I get a 1% annual return on my money, assuming of course payroll taxes are increased to make up for the pending shortfall due to the collapse of the Ponzi scheme? Sign me up, as long as I don’t have to make any choices!

That the suggestion that Washington must make the American people feel more financially secure can be made openly without ridicule is another example of how far the apple has fallen from the tree. Never mind actual financial security, or federalism for that matter. Washington is now responsible for the feelings of the electorate. Can’t they just make a law that says everyone must feel secure, and be done with it?

My approach protects the sanctity of the Social Security system as a secure foundation for retirement. It also expands individual savings opportunities outside of Social Security in order to provide all working Americans with an easy way to make their retirement more secure.

Social Security is now ‘sacred’. So sacred, in fact, that if I started a financial services company that offered an insurance scheme identical to Social Security in terms and implementation, Eliot Spitzer would have me drawn and quartered for securities fraud inside of a year. Far too sacred to be legal anywhere the SEC has jurisdiction. Only the federal government can be trusted with the awesome responsibility to steward the sacred Social Security.

I just want to opt out of Social Security. If I die, the government doesn’t have to give my family anything. If I’m disabled, leave me in the gutter to die. Until then, why can’t I keep my hard-earned money? If I want bread and circuses, why can’t I pay for them myself, instead of using the coercive power of government to get others to pay for them for me?

Yes, that’s a rhetorical question. I know, I know, if I stop paying in, there won’t be enough money to pay out those who are already in the system. Like, you know, a ponzi scheme.

Apparently Emanuel’s theory is that Social Security ‘reform’ (where there’s ambiguity, there’s a tax increase) is a good thing, but Americans are too attached to the security they get from the sacred Social Security program to allow any ‘reform’, so we need to create another entitlement/savings program for them to be attached to, after which they’ll be more willing to tolerate ‘reform’ of Social Security. Great idea. If I had no knowledge of past behavior of governments and entitlement programs, was incredibly naive, and was clueless as to human nature, I’d be all for it. As it is, I’m not.

I’d be happy to trade my involvement with Social Security for Emanuel’s quasi-private scheme, provide of course I had personal ownership of my savings account. However I see no reason to pay into Emanuel’s scheme as well as Social Security; it’s easier and less dispiriting to simply burn my excess cash.