Friday, January 25, 2013

Tax Incentives for Retirement Saving are not Working. Can we Find a Better Way? (Part 2)

In a previous post in this series, I criticized proposals to raise the eligibility age for Social Security and Medicare. It is already getting harder to save enough for a comfortable retirement; raising the eligibility age would just make it  still more difficult. In this installment, I turn to policies to encourage retirement saving, explaining why our current system is not working well and suggesting some alternatives.

Why should we make it easier to retire? Grasshoppers vs. Ants

We can start by asking why making it easy to retire should be an objective of public policy in the first place. The fable of the grasshopper and the ant is the lens through which many people view the issue. The ant works hard and saves carefully all summer, while the grasshopper sings and dances. When winter comes, the grasshopper begs for a handout. The fable portrays the ant as justified in shutting her door to him. Why should the government, as agent of the ant-like taxpayers that pay its bills, behave any differently toward grasshoppers who don’t have the self-discipline to save during their working years?

The most common response is to justify government support for retirement as a form of social insurance. Life is full of risks. For retirement saving, the relevant risks include spells of unemployment, health problems, the risk of losses or low returns on retirement savings, the risk of inflation, and last but not least, the risk of outliving one’s savings. When we take those risks into account, we understand that some people will reach retirement age without adequate savings not because they are grasshoppers, but because they are unlucky ants. Many of the risks that can thwart the best-laid plans for retirement savings are neither under the control of individuals nor privately insurable. Only the government is in a position to pool the risks broadly enough to guarantee a minimum level of retirement income for everyone. >>>Read More

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