Ralph Kramden, the bus driver in the never-ending television series “The Honeymooners,” was a working-class guy with a low income living in a Brooklyn apartment house in the mid 1950s. And although he made a small salary, about $3,500 a year, he still managed to save about $75 in a bank account. In an episode in which he is spooked by the IRS, afraid that a mistake on his taxes has wrecked his life, he discovered something in trying to figure out if he has forgotten to report some income: He didn’t report the measly two dollars or so in savings bank account interest. He is astounded. “You have to pay tax on savings bank interest?”
That’s right, Ralph. It is part of the anti-saving, spend big mentality that has prevailed in our country for generations, then and still today. It has given license to governments to overspend and impose tax laws that have often discouraged savings and encouraged consumption. That spend big was a philosophy once rejected by our grandparents and great grandparents, but now is not only an essential part of fiscal and monetary policy but our culture as well.
Blame It on Keynes
My own theory is the policy is the triumph of Keynesian economics. Keynes demeaned savings and believed that governments must continually spend and “keep booms going.” (In his most famous work, “The General Theory,” he seemed to downplay what happened when booms ended as many Americans found out in 2008, 2001, 1987 and I could go on and on given the sad record of our central bank, which fixes the price of money).
Possibly a new book, which doesn’t mention Keynes, may be part of a movement that could help return our nation to these traditional values once lost. The argument of the book is critically important to our nation and to millions of individuals headed for a lower standard of living if they don’t change their ways of spending and saving: Encouraging millions of workers to save for retirement isn’t just critical for them, it is also essential if America or any country is to achieve vigorous growth rates.
Such is the message of Putnam Investments’ Robert Reynolds who has just wrote the book “From Here to Security: How Workplace Savings Can Keep America’s Promise.” It is a timely book for millions of Americans who aren’t saving enough for retirement as well as a nation that needs more capital if it is ever to recapture the once vigorous growth rates. This included three or four percent annual GDP growth instead of the now one to two percent. This is a new norm that is small compared to the fast-growing economies in the world. Reynolds argues for new rules to encourage more retirement savings. He also believes that these saving friendly policies are a vital link to solving the retirement saving crisis.
Reynolds’ contends that the IRA and deferred contribution plans are working but need “some tinkering.” His proposed changes would ensure that more people have the opportunity to have automatic deductions and automatic savings escalations in the workplace. That’s because there is “a looming retirement savings risk for millions of Americans.” “The Retirement Savings Crisis is real and dead serious,” says Reynolds, president and chief investment officer of Putnam Investments.
“Nothing” Saved for Retirement
Not only are some people not saving enough, but the shortfalls in Social Security funding could lead to a 23 percent cutback in about a decade, Reynolds asserted. The problem becomes more difficult, he adds, because “some one third of Americans have nothing saved for retirement. The emphasis is on nothing.”
What’s wrong?
The book details that about 40 percent of Americans lack any payroll savings deductions at work. “Their retirement savings prospects are grim,” Reynolds warned. Yet he also emphasized that the recent pension reform, the Pension Protection Act of 2006 is working. Where automatic enrollment is in force, where automatic savings escalation provisions are in force and where investment advice is offered, contributions and savings levels are rising, Reynolds added.
“These are bringing tens of millions of Americans to full retirement readiness,” he said. However, he warned that “this progress must continue if we want to avoid a painful rise in financial stress and poverty among retirees,” according to Reynolds.
What’s to Be Done?
Reynolds called on lawmakers to make Social Security “solvent” for the long term so workers have a base of savings that can be added to private workplace savings. Social Security finances should be fixed through extending the retirement ages and tax changes. He also wants laws that would allow employers who don’t offer defined contribution plans to make automatic savings deductions for employees who want to set up IRAs or other tax advantaged retirement savings plans.
Access to saving vehicles is critical for achieving a fully funded retirement. “It is one of the key differentials,” says Harry Conway, president and CEO of the Employee Benefit Research Institute.
“Workers that have no access to a payroll savings plan stand to replace just 42 percent of their current incomes at the median and that includes Social Security,” Reynolds says. “But simply having access to workplace savings, nearly doubles that income replacement rate at the median to 79 percent.”
“You Got Paid? You Just Saved Some More”
Automatic enrollment with an opt out raises the rate of fully funding retirement to 92 percent. Automatic escalation increases the rate to over 100 percent, he said.
These automatic savings features, Reynolds adds, “makes success easy and failure hard.”
Approving these savings initiatives would result in an increase in the savings rate of hundreds of billions of dollars a year, Reynolds says. And that, he adds, is important “because savings drives growth.” He says that the nation’s $26 trillion in retirement savings “has already become a vital source of financing for our capital markets.” With more savings, Reynolds notes, it would help close the inequality gap and lead “to a true peoples’ capitalism.”
Reynolds makes some excellent points in this book that I highly recommend. Still, I think he doesn’t go far enough. I’d also like new rules for those who aren’t saving through qualified retirement plans and for those want to save beyond the maximum savings at work.
“Thank You for Saving”
I would propose that anyone who receives $10,000 or less in capital gains or dividends should not be taxed. They should only receive a letter from the United States Treasury Secretary congratulating the person for adding to the capital stock and thereby lowering the costs of capital, otherwise known as interest rates. Those generating more than $10,000 might pay something in taxes, but not a lot.
Another point in which I differ with Reynolds is Social Security reform. Social Security is a flawed program. One is forced to pay into this retirement program and what will one get in return isn’t very good. Maybe about one or two percent a year. If I forced you into my retirement program—for your own good (sic), the argument goes—and then told you, after 40 or 50 years of work, that I got you one percent or so of return what would you say?
You’d call the polizei at the Department of Labor and bay for someone to be sent to hoosegow en seguida!
The government not only is a bad money manager, but it is an avaricious one. When you finally get your Social Security payments after 40 or so years of “contributing” to the system (In my case, it will be 55 years or so since I started working when I was about 16 and started asking people what was this FICA thing that took so much of my wages), guess what happens?
Pay, Pay and Pay Some More to Social Security
Well, unless you’re very poor, you have to pay taxes on your payments. Wait, you paid a Social Security tax for 50 years or so and now you’re going to pay more in Social Security taxes to keep the system from going bust because for generations Social Security surpluses were used on non Social Security purposes such as making deficits seem smaller than they really were? (By the way, if you want more on some of the failures of Social Security please see my history of Social Security at Mises.com.).
We should return to the standards of before the Social Security deal of the 1980s: There should be no taxes on Social Security payments, no matter your income bracket. You earned them. The money mad U.S. government with its $20 trillion of “official” debt should keep its hands off them. I understand this position could start a class warfare debate.
“The rich should pay more,” the argument would go. The problem is the same as the federal income tax, which began in the early 20th century as only falling on those making $10,000 a year or more, which was less than five percent of the population. But, once established and later expanded, the income tax affected a lot more than the wealthiest Americans. So now even middle-class people pay taxes on their Social Security payments and there are calls to increase those taxes.
Valgame Dios! Does it ever end? (Strictly speaking, the answer is no. Many Americans want the estate tax extended. Sometimes I wonder, after my second or third Colt 45 in the Pascal-peace of Central Queens, are we really the scions of tax rebels?).
Today, there are well heeled people who can easily afford to pay taxes on their skimpy Social Security payments. The problem is many of those people weren’t rich in their 20s and 30s. when they were paying a lot more in FICA taxes than in income or investment taxes. Should they now be penalized for having imposing a lower standard of living on themselves and saving and investing a lot? Here, obviously, I take issue with Reynolds and others who are not as critical of Social Security, the flagship of our American welfare state, as I am.
A Reynolds Caveat
So, while I commend Reynolds for writing a very good book, my one objection is his plan for Social Security reform. Any reform of this badly run program should include giving the worker to control at least half or more of his Social Security “contributions” (I put that word in quotes because try not “contributing” and see what happens. It’s not pretty as some Amish people learned a few decades ago).
But this should please Reynolds: Having some of your Social Security going into private investments—not into a government treasury, where God knows what will happen to it—not only will increase private savings, it will help people feel good about taking control of their lives. They will want to save more and achieve the financial independence that is one of the goals of GregoryBresiger.com.
And savings, as the Austrian economist and Keynesian critic Ludwig von Mises reminds us in his seminal book “Human Action,” are how societies have prospered through many centuries.
Savings can liberate and elevate even average Babbitts living deep in Bunkerland (Yours truly!). And people who can save and invest on a regular basis will not have the frustrations of Ralph Kramden. He is never able to afford to move out of the apartment that, in another episode, he calls “a dump.”
