AmeriSwindle
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Democrats in Congress have proposed an apparent alternative to Social Security reform called the "AmeriSave" program. The proposal has several bells and whistles, but the linchpin is a totally new government-financed 401(k) or IRA matching program:
It is also a total fraud. The matching plan will have little or no impact on national savings. It also, by definition, does nothing to address the Social Security crisis (understandable since Democrats lie by insisting that there is no crisis anyway).
The proposed $1,000 match will not materially improve national savings, for a variety or reasons, most of which are variants of the Broken Window Fallacy.
Begin at the beginning: If the government is going to give Worker A an extra $1,000 entitlement, then that $1,000 has to come from somewhere else. Some possibilities:
--It can raise Worker A's taxes by $1,000 to fund his own $1,000 government match. That may sound perverse, but that never stopped the government before. And of course it would do nothing to increase Worker A's savings.
--It can tax Worker B that extra $1,000 to give to Worker A. But this creates no net savings either, it just transfers income to A from B. (Minor shifts in saving may result if Worker A has a greater marginal propensity to save, but such differentials are unproven and infinitesimal at best.)
--It can cut some other entitlement that Worker A is already receiving by $1,000. But like taxing Worker A to give back to Worker A, obviously this will have no net effect on Worker A's net savings.
--It can reduce non-entitlement government spending by $1,000 and give that money to Worker A. Now of course reducing government spending for its own sake is generally a good thing, but not if the money goes to another entitlement. The government is still just re-arranging the deck chairs. Sure there's an extra $1,000 in national savings, but if the government is, say, buying $1,000 less in paper clips, then there will be economic ramifications in the paper clip industry and therefore throughout the economy. Perhaps Worker C, employed in the paper clip industry, will lose his job. If so, then he sure won't be increasing his net savings -- indeed, his savings rate will plummet.
--The government can increase the deficit by $1,000. Well, that brings all the ills that deficit spending always brings: crowding out of private investment, higher interest costs to state and local governments when they borrow, increased trade deficits, inflationary pressures, and so on. One way or another, that $1,000 going to Worker A is coming out of the economy somewhere else.
Remember: no economy ever taxed its way into prosperity, and no economy ever redistributed its way into comfortable net national savings.
Also consider some other offsets:
--If Worker A suddenly finds himself with a new $1,000 annual entitlement, he may simply reduce his other savings. If the government gave you a free car ever year, would you still buy one with your own money? The same idea applies to the AmeriSave proposal.
--This program would only apply to the middle-class and working poor. Which means of course that the overall federal tax system will become even more progressive than it already is, "tax cuts for the wealthy" notwithstanding. Given the progressivity of the federal income tax, the multiple layers of progressivity in Social Security (including the proposed Pozen plan to cut benefit growth for the rich), is it really necessary, or fair, to implement yet another layer of progressivity on high-income workers?
In short, "AmeriSave" AmeriStinks.
If the government truly wanted to foster greater national savings, it could do so quite easily:
--Eliminate all taxation of interest income (doing likewise for dividend income and realized capital gains wouldn’t hurt either).
--Eliminate the outrageous and inexplicable "use it or lose it" rule for flexible spending accounts. See my most recent post on the subject.
--Eliminate all ceilings on IRA and 401(k) contributions and allow a taxpayer to contribute as much of her earned income as she desires. If a person earning $200,000 per year decides that she can live comfortably on only $150,000, then why not let her defer $50,000 into her IRA? (The answer of course is that the government relies heavily on the rich, since only the rich pay income tax. The government in its bloat simply cannot let so much current income go untaxed.)
--Reform the Alternative Minimum Tax before it explodes for the middle class in 2006.
--Stop making it impossible for the working poor to save after seeing one-eighth of their paychecks confiscated in FICA taxes to feed the twin maws of Social Security and Medicare.
--By the same token, remove the moral hazard of Social Security with its (non-binding and non-guaranteed) pledge to pay currently promised benefits in full. ("Why should I bother saving for retirement if I'll have Social Security anyway?") Private accounts achieve this alignment of workers' interests and the government's desire to increase net national savings. Which doesn't stop the new AmeriSave crowd from opposing them blindly and unswervingly.
--Reduce government spending and taxes, together, as much as possible. Keep money out of the government detour, and more of it will find its way into bank accounts, mutual funds and other investments.
The AmeriSave plan is nothing more than fraudulent economic gobbledygook wrapped up in an inspiring name and a whirlwind of political spin.
Hopefully it will die a quick and much-deserved death and the real reform proposals can proceed.
Other thoughts at Angry Bear, Social Security Choice. My Social Security archive can be found here.
Cross-posted at Bastiat's Window.
AmeriSave Match: Help middle and working-class families achieve retirement security by matching dollar-for-dollar the first $1,000 contributed to an IRA, 401(k), or similar plan. The AmeriSave Match will not involve creating a new type of account; instead, it builds on a successful model of 401(k)s and IRAs by increasing incentives to participate. Individuals would receive their AmeriSave Match after they filed a tax return, at which time the funds would be directed to their 401(k) or other plan.This new matching scheme is apparently meant to deflect from (i.e., continue the absolute obstruction of) private accounts within Social Security.
It is also a total fraud. The matching plan will have little or no impact on national savings. It also, by definition, does nothing to address the Social Security crisis (understandable since Democrats lie by insisting that there is no crisis anyway).
The proposed $1,000 match will not materially improve national savings, for a variety or reasons, most of which are variants of the Broken Window Fallacy.
Begin at the beginning: If the government is going to give Worker A an extra $1,000 entitlement, then that $1,000 has to come from somewhere else. Some possibilities:
--It can raise Worker A's taxes by $1,000 to fund his own $1,000 government match. That may sound perverse, but that never stopped the government before. And of course it would do nothing to increase Worker A's savings.
--It can tax Worker B that extra $1,000 to give to Worker A. But this creates no net savings either, it just transfers income to A from B. (Minor shifts in saving may result if Worker A has a greater marginal propensity to save, but such differentials are unproven and infinitesimal at best.)
--It can cut some other entitlement that Worker A is already receiving by $1,000. But like taxing Worker A to give back to Worker A, obviously this will have no net effect on Worker A's net savings.
--It can reduce non-entitlement government spending by $1,000 and give that money to Worker A. Now of course reducing government spending for its own sake is generally a good thing, but not if the money goes to another entitlement. The government is still just re-arranging the deck chairs. Sure there's an extra $1,000 in national savings, but if the government is, say, buying $1,000 less in paper clips, then there will be economic ramifications in the paper clip industry and therefore throughout the economy. Perhaps Worker C, employed in the paper clip industry, will lose his job. If so, then he sure won't be increasing his net savings -- indeed, his savings rate will plummet.
--The government can increase the deficit by $1,000. Well, that brings all the ills that deficit spending always brings: crowding out of private investment, higher interest costs to state and local governments when they borrow, increased trade deficits, inflationary pressures, and so on. One way or another, that $1,000 going to Worker A is coming out of the economy somewhere else.
Remember: no economy ever taxed its way into prosperity, and no economy ever redistributed its way into comfortable net national savings.
Also consider some other offsets:
--If Worker A suddenly finds himself with a new $1,000 annual entitlement, he may simply reduce his other savings. If the government gave you a free car ever year, would you still buy one with your own money? The same idea applies to the AmeriSave proposal.
--This program would only apply to the middle-class and working poor. Which means of course that the overall federal tax system will become even more progressive than it already is, "tax cuts for the wealthy" notwithstanding. Given the progressivity of the federal income tax, the multiple layers of progressivity in Social Security (including the proposed Pozen plan to cut benefit growth for the rich), is it really necessary, or fair, to implement yet another layer of progressivity on high-income workers?
In short, "AmeriSave" AmeriStinks.
If the government truly wanted to foster greater national savings, it could do so quite easily:
--Eliminate all taxation of interest income (doing likewise for dividend income and realized capital gains wouldn’t hurt either).
--Eliminate the outrageous and inexplicable "use it or lose it" rule for flexible spending accounts. See my most recent post on the subject.
--Eliminate all ceilings on IRA and 401(k) contributions and allow a taxpayer to contribute as much of her earned income as she desires. If a person earning $200,000 per year decides that she can live comfortably on only $150,000, then why not let her defer $50,000 into her IRA? (The answer of course is that the government relies heavily on the rich, since only the rich pay income tax. The government in its bloat simply cannot let so much current income go untaxed.)
--Reform the Alternative Minimum Tax before it explodes for the middle class in 2006.
--Stop making it impossible for the working poor to save after seeing one-eighth of their paychecks confiscated in FICA taxes to feed the twin maws of Social Security and Medicare.
--By the same token, remove the moral hazard of Social Security with its (non-binding and non-guaranteed) pledge to pay currently promised benefits in full. ("Why should I bother saving for retirement if I'll have Social Security anyway?") Private accounts achieve this alignment of workers' interests and the government's desire to increase net national savings. Which doesn't stop the new AmeriSave crowd from opposing them blindly and unswervingly.
--Reduce government spending and taxes, together, as much as possible. Keep money out of the government detour, and more of it will find its way into bank accounts, mutual funds and other investments.
The AmeriSave plan is nothing more than fraudulent economic gobbledygook wrapped up in an inspiring name and a whirlwind of political spin.
Hopefully it will die a quick and much-deserved death and the real reform proposals can proceed.
Other thoughts at Angry Bear, Social Security Choice. My Social Security archive can be found here.
Cross-posted at Bastiat's Window.
Posted by KipEsquire on
28 July 2005
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