When Saving Is a Problem Not a Virtue
Thursday, April 18, 2013
President Obama’s fiscal 2014 budget has a section prohibiting individuals from accumulating over $3 million in tax-preferred retirement accounts. It states: "Individual Retirement Accounts and other tax-preferred savings vehicles are intended to help middle class families save for retirement. But under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving. The budget would limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million for someone retiring in 2013."
At a time when the media is full of articles on baby boomers not saving for retirement and about the financial challenges faced by college graduates loaded down with student debt, and when the country’s savings rate is extremely low, only this administration could identify as one of its budget priorities the problem of excess saving in tax protected retirement accounts. Perhaps some branch of Krugman-inspired economics has described excess savings in IRAs as an economic problem of epic proportions, but the consensus seems to be that Americans save too little, not too much.
Perhaps the Obama administration is hoping to close the budget deficit by clamping down on excess saving. The budget forecasts that capping contributions will increase revenue by only $9 billion over ten years, which will cover the current deficit for about three days. Not only that, but it’s not new revenue, but rather revenue that will be recognized earlier rather than later, since any money spent from retirement accounts is fully taxable. No, it’s clear that the administration’s target here is, once again, the nebulous concept of “fairness.” Or, as the president might say, “I do think, at a certain point you’ve made enough money.” The president is moving beyond “enough” income and is now drawing a line in the sand determining when you’ve saved “enough” money.
The president is moving beyond ‘enough’ income, and is now drawing a line in the sand determining when you’ve saved ‘enough’ money.
My grandparents lived into their nineties, and my parents are still hale and hearty at nearly 80. My wife has similarly long-lived ancestors. Retirement income will most likely have to last at least 30 years for one of us, if not both. The president, in his wisdom, has thrown a dart at the board and decided that $200,000 is a reasonable amount of retirement income. But the level of income that will seem reasonable at 65 might not be so adequate after 30 years of inflation. Imagine a 6 percent rate of inflation for those 30 years — that would be extreme, but perhaps not surprising, given that the government needs to inflate away our present debt. That $200,000 would then be worth around $40,000 per annum now. Crank up inflation a point or two higher, and the president’s proposal seems less and less “reasonable.”
A cynic might note that the level chosen by the president’s budget as a reasonable level of income is the same as the pension for retired presidents. I guess if it’s good enough for Bill Clinton, it’s good enough for the rest of us. Although, the rest of us won’t have those lucrative speaking engagements. One wonders if the fact that Mitt Romney reportedly has as much as $100 million in IRA accounts helps explain the change. Could the rest of us face limits on how much we can save because Romney was better at picking investments than he was at running for president?
There have always been income limits on contributions to the various tax-deferred accounts, but this is the first time there will be limits tied to the dollars in the account. That’s a rather important distinction, it seems to me. The proposed limits directly penalize success in the management of money and the patience to let money grow. Self discipline, prudence, and financial wisdom would, like savings, seem to be in all-too-short supply these days, but the old-fashioned virtues have to give way to “fairness.” As does economic growth, if the past five years are any indication.
Reading that budget provision about limiting retirement accounts brought back memories for my wife Julie and me. In 1982, we loaded up our two kids in our 1978 Ford Fairmont and drove the 65 miles south to St. Joseph, Missouri, to the St. Joseph Trust Company to open up a Keogh account. We didn’t realize we lacked enough income to protect from the taxman with such an account, but saving for the future and tax avoidance were both part of the family ethic; this day was a milestone of sorts for our family tree. No doubt the lawyers and financial advisors running the place had a good chuckle after we left. A blue-jeaned, self-employed farmer with two little kids, clearing $20,000 a year, was hardly a gold-plated candidate to generate the kind of trust fees that built the brand new office building where the firm was located. But they were polite while we were there, and we began our life-long commitment to building a nest egg for retirement.
The budget forecasts that capping contributions will increase revenue by only $9 billion over ten years, which will cover the deficit for about three days.
The Keogh plan is long gone, replaced by an easier-to-manage SEP-IRA; the St. Joseph Trust Company was replaced by a discount broker who charges us a nominal fee rather than 1 percent of assets. Some years we made the full contribution, and some years our contribution was diminished by drought, floods, or real estate purchases. I understand the “Random Walk Down Wall Street,” and appreciate the reasoning behind index funds, but I’ve always picked my own investment vehicles for our account, enjoying reading investment tomes, subscribing to Value Line and Forbes, and matching wits against the accepted wisdom that it’s impossible to beat the market over the long term. I’m sure I’d have been as well-off just picking index funds, but I wouldn’t have had nearly as much fun. We survived the crash of 1987, the stock market declines in the early 2000s, and the Great Recession in 2008, although I didn’t tell my wife how badly we were hurt by the latter until after we’d recovered. I’ve stayed pretty well invested in the stock market during the last three decades, and, with 15 years to go until I have to withdraw funds from the account, I am satisfied with the progress we’ve made toward a safe and secure retirement.
I’m not terribly worried that my savings will reach these proposed limits, although they could, if the next decade is kind to investors. It will be easier to reach those limits if interest rates increase, and they surely will, because the amount necessary to buy an annuity yielding a “reasonable” level of retirement income will drop. Even if we bump up against those limits, my wife and I won’t change our behavior, because the habits of thrift and saving are permanent. Like Scrooge McDuck, we’ll just pile up cash and slide down a mountain of rapidly depreciating bills. The administration must be assuming that we drones will continue to save like we always have. The budget writers are convinced that those who save and plan for the future won't respond to a government that no longer respects the virtues of saving and investing. That's the only way that penalizing saving won't harm the economy. That's the only way the president's budget makes sense.
Blake Hurst is a Missouri farmer and a frequent contributor to THE AMERICAN.
FURTHER READING: Hurst also writes “The Next Real Estate Bubble: Farmland,” “The High, High Cost of Low, Low Rates,” and “Organic Illusions.” Andrew G. Biggs explains “Why Expanding Social Security Is a Bad Idea,” Alan D. Viard notes “The Other Tax Increase on Saving,” and James Pethokoukis asks “What Has Obama Got Against Private Savings and Investment?”
Image by Dianna Ingram / Bergman Group