Urgh. An interminable State of the Union Address. So let’s forget that, and focus on a completely different approach, laid out in today’s Morning Jolt . . .
The Three-Accounts Plan for a Real American Recovery
We’re stuck with this guy until January 2017. We don’t know exactly what the future holds, but the outlook on the horizon isn’t good. The economy sputtering along, unemployment still high by historical standards, low workforce-participation rate, a complicated mess in health care, annual deficits that are merely ludicrously high instead of incredibly ludicrously high, chaos overseas, hoping our numbskull big campaign-donor ambassadors manage to avoid exacerbating a crisis . . .
Imagine somebody comes along and says, “Okay, America. We’ve tried that approach and we’ve seen what it gets us. Let’s try a different approach. Let’s try an approach that sets you up with the future with three accounts.”
Those three accounts are a 401(k) or IRA, a 529 plan for education, and a Health Savings Account.
Each of those accounts operates on the same basic concept: you put money in, sometimes your employer kicks some money in, and the government gives both of you some big tax incentives. Unlike a bank savings account paying one tenth of 1 percent to 1 percent (annual percentage yield), money put in these accounts gets invested in a fund that you choose and most years increase in value by several percentage points. These funds can go down in value, but most years will go up in value, and some years will go up a lot, depending on how the market and broader economy perform and the judgment of the folks managing the fund.
The 401(k) or Individual Retirement Account: These types of accounts accumulate retirement savings; 401(k)s are set up by employers, IRAs are, as their name suggests, set up by individuals.
The 529: This is an education-savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. Your contributions are not deductible when you make them, but your investment grows tax-deferred, and when you withdraw to pay for the college costs, you pay no federal tax on that. Plan assets are professionally managed either by the state treasurer’s office or by an outside investment company hired as the program manager.
Health savings accounts, the investment account that typically accompanies high-deductible health plans, are enjoying a boost: In 2013, some 7.2 million people had HSAs, up from 6.6 million in 2012, according to the Employee Benefit Research Institute. During that period, assets also leapt, reaching $16.6 billion in 2013, up from $11.3 billion in the previous year.
HSAs typically run in tandem with a high-deductible health care plan, with the intention that insured people tap the HSA itself to cover qualified medical expenses. Employers and insurers generally like HSAs because insured people are using the account to foot the bill for services until they hit their deductible. In theory, if employees are aware of the real cost of medical services because they are shelling out for those expenses, they’ll become more educated consumers, according to Paul Fronstin, senior research associate at EBRI.
Employers and employees can contribute to HSAs, and the chief benefit is that the funds contributed won’t be subject to federal income taxes when deposited. Any distributions made for qualified medical expenses can be made without incurring taxes.
Many successful, secure Americans have these accounts. If everyone in America had these three accounts, their worries about paying for their retirement, paying for their children’s education, and paying for their health care would be greatly ameliorated. Not completely erased, but everyone in America would have one, two, or three little nest eggs, each enjoying the fruits of compounding returns. As time goes by, your accounts would grow and your worries would shrink.
We could either mandate these accounts for every American . . .
(sounds of conservatives drawing swords from sheaths)
. . . or we could make it unbelievably easy to set up these accounts. (My aim, of course, is to turn every American into an investor, from birth to death.)
You’ve just had a child? Congratulations, mom and dad, here’s the setup form for your 529 plan with your child’s new Social Security card. Plug a bit in every year over 18 years, and you’ll have a nice pile of money to put towards college, trade school, etc. If anything, we should expand it so that your 529 never goes away, and you can put money in at any time to use on a graduate degree, certification programs, or any other instructional course.
You’ve just turned 18? Congratulations. As you pick up your driver’s license, here’s the setup form for your IRA and Health Savings Account.
Instead of fining people 1 percent of their income for not having health insurance — up to 2 percent in 2015 and 2.5 percent in 2016 — let’s make it easy to put 1 percent of your pre-tax paycheck into any or all of these accounts. Let’s let Americans pay one less percentage point of their current 6.2 percent Social Security tax into their IRA or 401(k). Let’s let Americans pay a half a percentage point of their current 1.45 percent Medicare tax payment into their Health Savings Account!
(Sound of Democrats drawing swords from sheaths)
We can fiddle with the tax code to give employers huge incentives to match donations to these accounts. (Democrats: “Hey, you’re reducing revenue!” Me: “Yes, and ameliorating three big problems that all of this federal spending has tried to address and largely failed: anxiety over paying for health care, education, and retirement.”)
You know who once supported one piece of this proposal? Hillary Clinton, back in 2007, who wanted a universal 401(k). One wrinkle was that she had the federal government matching the first $1,000 in savings for married couples who earn up to $60,000 a year and would match the first $500 for married couples who earn $60,000 to $100,000 a year. These matching donations from Uncle Sam would cost $20 billion to $25 billion per year. Not her worst idea ever, but I’d prefer to give an employer a tax incentive to the employer or give the individual an expanded tax deduction — deduct 105 percent of your annual contribution? 110 percent? — than the U.S. Treasury matching your contribution.
Last night, Obama took a baby step in the right direction with this idea:
And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks. That’s why, tomorrow, I will direct the Treasury to create a new way for working Americans to start their own retirement savings: MyRA. It’s a new savings bond that encourages folks to build a nest egg. MyRA guarantees a decent return with no risk of losing what you put in. And if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans. Offer every American access to an automatic IRA on the job, so they can save at work just like everyone in this chamber can.
As I understand it, the MyRA would have no minimum deposit or balance, and is designed to help low-income earners sock away enough money until they can get a regular IRA.
A “Three Accounts” approach to Americans’ economic security would be big, it would be bold, and it would tap into Americans’ distrust of Washington, now reaching Deepwater Horizon–level depths. We can tweak the details, but the idea is to give all Americans the tools to build their own prosperity and restore their confidence that tomorrow will be better than today.