Candidate Savings Time

Tuesday, October 16, 2007

AMERICANS DON'T save enough. For the past few years, Americans have been saving less than 1 percent of their disposable incomes, down from 11 percent in 1984. The problem may be ameliorated by wealth that's accumulated in the form of appreciated housing values and a growing stock market. Nonetheless, the savings shortage is worrisome. An aging population ought to be putting away money for retirement. In addition, the failure to save reduces the amount of money available for investment and increases reliance on foreign capital.

Two presidential candidates have recently entered this debate, with very different proposals. In the Republican camp, former Massachusetts governor Mitt Romney wants to exempt households making less than $200,000 from having to pay taxes on any money they earn from savings, in any form. Among the Democrats, New York Sen. Hillary Rodham Clinton would offer generous government matching payments to lower- and moderate-income people who put money into retirement accounts. Ms. Clinton's is by far the better approach.

Mr. Romney's scheme is poorly designed, expensive ($32 billion a year) and potentially counterproductive. Americans currently have ample opportunity to save tax-free, with an array of vehicles for retirement and education savings. The problem is that people don't use those mechanisms, and there's little empirical evidence that Mr. Romney's plan would provide a boost. Families making below $50,000 a year would see no benefit from his proposal; families at or near $200,000 would reap far more benefits than those earning around $70,000. Moreover, eliminating taxes on savings could destabilize the existing retirement savings system. Why lock up money for retirement when you can get much of the same benefit without strings attached?

By contrast, Ms. Clinton's plan would direct savings where they are most needed -- to retirement accounts -- in a way contrary to the perverse current system, in which the best-off Americans get the most from tax incentives to save. Ms. Clinton would have the government match the first $1,000 in savings for married couples making up to $60,000. For those making between $60,000 and $100,000, the government would match 50 percent of the first $1,000. The money could go into existing 401(k) accounts or new, portable accounts. The cost, $20 billion to $25 billion, would be paid for by freezing the estate tax exemption at its 2009 level, $7 million per couple.

Ms. Clinton would not go so far as to require employers to automatically enroll workers in retirement savings plans, with workers having the option of opting out. But employers would be encouraged to do so, with tax credits to small businesses that provide direct deposit options. Nearly one-third of households do not have enough retirement savings, along with Social Security benefits, to replace even half their pre-retirement incomes. Ms. Clinton's proposal is the boldest of the campaign to address this troubling situation.

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