The Politics of 401(k)’sOctober 14, 2008
The winds of political populism are never far from the surface of American politics. They can come from the right (Huckabee) or the left (Edwards). I believe they will increase in the coming years. My immediate concern is that, in a country that does little to create incentives to save, populist politicians could easily make the problem worse.
To the extent that Americans do save they often do so through employer-sponsored retirement plans, 401(k)’s and other tax shelters similar to these vehicles. These plans are a huge political target, and would be easy to exploit in order to foment class warfare and generate some extra revenue for the Treasury. To the aspiring populist politician I offer the following language that you can use at your next campaign stop in Toledo.
My fellow Americans, our country is facing many problems. We desperately need to make strategic investments in energy, in education, in health care [short dramatic pause] to make sure the American worker remains the most competitive and productive in world. We owe it to our children to make sure we stand up to the tough decisions now so that they aren’t faced with insurmountable problems later.
My friends, some Americans have benefited more from the gifts of this country than others. Some are able to retire comfortably at an early age because they worked for large corporations and had access to generous retirement plans. We gave them a break when they put money in these plans, they did not pay taxes on it, and they are now living better off than many of us. Fairness dictates that those who benefited from this loophole in the tax system pay their fair share.
Today I am proposing that anyone who has accumulated more than one million dollars in a 401(k) plan be subject to a one time 10% windfall retirement tax on that money. They have benefited from the system. Now it is time for them to support the country that allowed them to accumulate this wealth. To the 95% of Americans who don’t have this much money in these tax loophole accounts I will never propose additional taxes on your money. You will need that to secure your own retirement.
Not only do I think the kind of language I’ve written above is plausible in coming years, I think it is likely.
How do we avert this? Perhaps we cannot. But getting more people involved in tax-deferred savings plans would help. The more people you have involved, the more obvious it is to a broader cross-section of the electorate that any type of windfall tax on this money would be unfair. Expanding access to small businesses would move us in the right direction, as would the ability to divert tax refunds directly into tax-deferred savings accounts. Mr. Obama’s recent proposal (yesterday) to allow tax-penalty-free withdraws from these accounts would not help. Not only would it encourage people to draw down their retirement savings, it would make that money seem less like retirement savings and more like ordinary income. To the extent that the public views it as ordinary income it makes it far psychologically easier to believe taxing these “rich” people is fair. Even the threat of this kind of populist-inspired taxation is a serious disincentive to savings.