How the Presidential Candidates Address the Savings ProblemMay 26, 2008
One question that I’m frequently asked is how the current presidential candidates address the savings problem. Here is a short version of what they are proposing.
Barack Obama and Hillary Clinton both support a savings match program for lower income Americans. Relative to the hopelessly complicated Savers Credit Program currently in place these cash matching programs have shown some promise of increasing savings rates among the poor. Clinton’s program is a little more generous than Obama’s, the federal government matches dollar-for-dollar up to $1000 for families earning under $60,000 while Obama’s program offers a 50% match for the first $1000 of savings and caps the income eligibility at $75,000. But, either plan would probably increase savings among lower income Americans. Obama also supports a federally mandated small-business IRA plan, one that looks similar to the “Automatic IRA” forwarded by Mark Iwry (Brookings Institute) and David John (Heritage Foundation). In this plan small businesses would be required to allow their employees access to a government-sponsored defined contribution retirement savings plan. It is unclear whether the government would manage the assets or if it would negotiate with private companies to manage those funds. Clinton takes this one step further with her “American Retirement Account” plan, essentially allowing all Americans to contribute up to $5000 on a tax-deferred basis in this new type of IRA, regardless of their employement situation or whether their current employer offers a tax-deferred plan of their own.
Obama’s plan would put some burden on small business owners while Clinton’s would not. What I do like about Obama’s plan is that successful savers often do so through employer-sponsored plans and people who work for small businesses do indeed often face a situation in which their employer offers no retirement plan. It is directed at an obvious gap in the system. Clinton’s is certainly more generous in the federal dollars spent, either directly or via tax credits. Finally, it is difficult to say with certainty which plan would spur more savings because, as of this writing, Clinton provides considerably more detail about her plan than Obama.
John McCain offers two proposals directly aimed at increasing savings. First, he supports partial-privitization of social security. My belief is that partial-privitization would benefit poorer families much more than wealthier families (for a future post). He also supports decreasing taxes on capital gains and dividends. This is a tricky one. Increasing the returns to savings is certainly a good incentive to save more. And there is ample evidence from academic economists that decreasing taxes on investement returns is a good thing for the economy at large. However, tax cuts without matching spending cuts will increase the budget deficit. Buget deficits implicity tax our future income whether we like it or not. That is certainly true for any of the candidate’s plans, not just McCain’s.
So, the candidates are putting out a few proposals, some well-developed and others less well-developed. I’ll stay tuned for anything new that hits the radar screen.