Whatís the first step to revising Americaís low saving rate? Cut out all the current incentives for savings enshrined in the tax code. Itís not as crazy as it sounds. Recently, Senate Finance Committee leaders Max Baucus and Orrin G. Hatch endorsed this radical approach to tax reform by vowing to wipe the code clean and start over with a blank slate.
Since Congress last passed a comprehensive tax reform in 1986, there has been a proliferation of deductions, credits and expenditures that have added complexity but generated meager amounts of net new savings. The senators vowed to justify each and every deduction, credit and expenditure that makes its way back into the tax code. Theyíre on to something. Rather than costly tax shelters, we need incentives that work. The ďblank slateĒ approach offers an opportunity to go back to the drawing board and get it right.
The current code gets plenty wrong. Not only does it fail to promote fundamental policy goals, it wastes precious public resources. For example, study after study shows that the 401(k) and the individual retirement account fail to help Americans build savings, even as the cost to the government of offering these tax shelters rises. The Congressional Budget Office has shown that two-thirds of the benefits associated with these tax expenditures gets funneled to the top 20 percent of earners who make the bulk of the contributions to these tax-advantaged accounts but need the least amount of help building up their nest eggs.
Whatís more, mounting evidence shows that the rich arenít saving more in response to these incentives: Theyíre just shifting funds that would have been saved in taxable accounts into nontaxable accounts. The wealthiest Americans arenít cheating here; theyíre just playing by the rules written by Congress. The problem is that the game isnít fair or particularly smart. The lower 60 percent of income earners ó the very families that could use the support ó are allocated just 16 percent of the tax benefits.
What we need are real supports for all Americans to save. Instead of the current, upside-down system of conferring gifts to the retirement accounts of the already wealthy, consider the possibilities of an accessible and flexible financial security credit that would provide real saving incentives for working families. In lieu of a tax deduction for contributions to designated accounts, we would encourage saving among families who actually make financial sacrifices to save for their retirement, their childís college education or an emergency fund. For the single mom in the 10 percent tax bracket, suddenly an abstract 10 cent benefit on owed taxes becomes, say, a 50 cent matched benefit deposited directly in her daughterís college savings account.
The savings infrastructure supported by our existing tax expenditures is far too dependent on blind luck to justifiably be the recipient of so many tax dollars. For instance, success in retirement savings depends in part on whether your employer offers a plan, whether your employer chooses to match contributions in a low-fee plan and whether youíre able to stay with such an employer for a substantial period of time. Most of us just arenít that lucky. According to the National Institute on Retirement Security, 45 percent of working-age households have no retirement account assets at all, let alone employers that generously match savings contributions.
Consider another proposal: a universal 401(k). This policy would ensure that everyone has a place to save for their long-term needs. In this economy, it would provide a stable way for a young worker who changes jobs frequently to save for retirement, without relying solely on good fortune or the good intentions of his or her employers.
By throwing out inefficient incentives that provide needless windfalls to the wealthy for merely going about their daily routines, the Senate Finance Committee is opening the door to these effective and common-sense policies. Saving and developing a nest egg is a shared American goal. If we are creating a tax code from scratch, letís establish rules that help us achieve it.
Reid Cramer is director of the Asset Building Program at the New America Foundation, a nonpartisan public policy institute based in Washington, D.C.