Robbing Piggy Banks

Credit: William Waitzman for Barron's

Credit: William Waitzman for Barron’s

This is excerpted from an article in this week’s Barron’s Magazine:

President Obama Thinks Your IRA Is Too Big


The White House budget proposes limiting contributions to tax-deferred retirement accounts for the wealthy. The complexities are head-spinning.

When President Barack Obama released his fiscal 2014 budget in April, it included a proposal to set a cap on tax-advantaged retirement savings for wealthy individuals. In the scheme of the larger budget, let alone the partisan rancor sure to engulf any negotiations, it was small potatoes. But consternation — then uproar and outrage — followed. The failure of Americans generally to save enough for retirement is well documented, and needs no repeating. But even those people lucky enough to have built up seven-figure nest eggs are feeling squeezed by the trifecta of low interest rates, volatile markets, and increased life expectancies, which have put a big dent in how much they can withdraw each year without risking running out of cash. They felt like they were being targeted for having saved diligently and been financially successful.


It appears Mr. Obama believes this is a good way to mitigate the winner-take-all nature of success in a free society. Yes, we must do something to spread the benefits of economic success, but one can only marvel at how wrong-minded this suggested tax policy is. Retirement saving is a private good, which means you and I can choose to save just as much as we wish and there is a well-developed market of choices that meet our individual needs. People have company pensions, savings accounts, annuities, 401ks, and many other investment vehicles with which to accomplish this. On the public side we have the entitlement program of Social Security. When originated in 1935, the Social Security Act was meant to be a complementary public pension system to insure that people with inadequate savings or unfortunate financial circumstances did not suffer abject poverty. It was NEVER meant to be the sole source of retirement support for the entire population.

Private retirement savings help mitigate dependence on the Social Security trust fund and there is probably a reasonable argument to be made over raising the retirement age and means-testing. But our tax policies have deliberately tried to encourage private savings to increase national savings. This proposal endeavors to go backwards, presumably under some misguided notion of “fairness.” One must also assume that this president believes the government is the best or only vehicle to tax and redistribute the benefits of economic success. But it makes far more sense to extend the tax benefits of saving to the lower and middle income classes rather than seek to restrain the savings of the successful. For example, why limit contributions? The only reason not to do so must be some misplaced desire to increase tax revenues to grow the public sector. But the private economy has proven far more efficient in the provision of goods and services and the desire of some in Washington to increase our dependence on inefficient public goods is counter-productive to our material well-being as well as our personal freedoms. Private savings are a source of capital and one feels the need to constantly remind our political class of the meaning of “capital-ism” with pointed references to the etymology of the word.  One wonders if the thinking in Washington ever gets that far.

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