The Subtext of the Trump Retirement Accounts

Commentary

At the State of the Union address, President Donald Trump announced a new program for retirement. For people who do not get an employer match for their 401(k) retirement plans, he wants the federal government to provide the match for up to $1,000 per year. This will not likely be a direct subsidy but rather a tax advantage for saving for later years.

This would pertain to perhaps 57 million Americans who do not enjoy an employer match for retirement savings. Nearly four in five workers without an employer-sponsored retirement plan earn less than $53,000 per year. They are more likely to work at small businesses or contracting services and tend to be young, female, or a minority.

The age of the pension for the private sector is gone. It’s up to everyone (unless you work for the government) to provide retirement income streams.

The details of the program are still to be worked out. Some versions of this have been tried in the past and failed to catch on. But they didn’t have the Trump brand behind them. This might finally be the moment to create a widespread and broad participation in a retirement plan that has made millions of seniors very rich. Those people who opted out or cannot participate will see their net worth suffer by comparison.

The spirit is right here. U.S. savings rates are pathetic, a mere third of what they were in the 1960s. That is economically harmful. Economic growth requires investment. Investment requires deferred consumption. Deferred consumption means savings. But saving also needs to be rewarded with interest or higher earnings from financials. That’s obviously happened with tax-deferred accounts that were created to make this possible. In many ways, these have saved millions of Americans and really an entire generation from financial hardship.

This plan dovetails nicely with Trump Accounts for kids that trigger a match from the federal government when parents invest in their kids’ futures. These accounts can be withdrawn after the age of 18 with tax advantages, thereby providing a financial boost at the start of a career or higher education.

Now let’s talk about the elephant in the room: the Social Security system. This program was kicked off by then-President Franklin Delano Roosevelt as a form of forced savings for retirement, part of a broader effort for the government itself to provide cradle-to-grave income support. The program has never been on solid footing because the first flow of benefits rapidly exceeded the contributions made into the system. Very quickly, we learned that this would not be real savings but rather another welfare program.

To this day, most people do not know that the federal government is not holding onto the money that you pay in. It is used to pay existing retirees. Indeed, it is not a savings program at all but a straight-up wealth transfer. It was lucrative for several generations but gradually became less and less remunerative. Today it pays a fraction of what might have been earned if that same amount of money had been invested in a cautious portfolio of stocks and bonds.

Today’s young and middle-aged people hardly take Social Security seriously as anything but an annoying tax. The payout doesn’t even lift anyone out of poverty, which is a serious tragedy. You pay in all your life and get peanuts at the end. This is not how the program was supposed to work, but it is what eventually would need to happen given the structure. There is not much point in speaking about when the program will be technically bankrupt because it has been bankrupt from the onset. All the rest is an illusion.

In a perfect world, the program would just go away but this is not possible. The people who have been promised a payout will get their payment for which they have been paying taxes all their working lives. It remains a serious hot-button issue that not a single sitting politician is willing to talk about with any degree of frankness. Meanwhile, eliminating the payroll tax that funds it would blow open a huge budgetary hole that would explode federal liabilities.

There have been many efforts in Congress for many years that attempt to step away from this structure, but none have amounted to anything. Even the smallest reforms are denounced with vicious demagoguery that causes sitting politicians to lose elections. Even if politically unviable, something needs to be done. Everyone will admit this in private, even if nothing is done about it in public life.

What is a viable step? Trump seems to have come up with an answer: Try a complete workaround. Keep the Social Security system in place but provide a way for all Americans to save for their own retirements on an entirely voluntary basis, a path not just for people with employers who match contributions but for everyone else too, in partnership with the federal government.

To be sure, an objection might be that the federal government should not be involved in savings decisions by citizens or otherwise making programs that skew spending decisions. I agree with this exhortation. That said, this ship sailed long ago. There is no question that the federal government will be involved. It has been involved for 90 years. The only question now is whether its involvement provides a pathway out of an unworkable system or digs in deeper.

What the Trump Accounts program does is provide an alternative. Ideally this would happen by providing a $1,000 tax break for income put away in retirement, which might be called a match for marketing purposes but there doesn’t have to be actual fiscal allocations involved. It only means that an additional contribution of $1,000 can be added per year entirely tax-free. That bolsters the incentive to save while not costing taxpayers anything.

If this program is given enough time to be promoted and pitched, it could actually work to the point that the Social Security system itself becomes ever less relevant in people’s lives, such that the entire program will become deprecated and less a flashpoint. After all, if a retiree is sitting on several million dollars coming in on a tax-free basis at retirement age, and the Social Security contribution is only a few hundred dollars per month, it is far less relevant in people’s lives.

Donald Trump is a businessman above all else, and he understands that the retirement system as it stands works only for people in a position to make it work. Such people have done very well. But for those working for their own business, a small business, or as contractors, it is another matter entirely. This proposed new program adds to the incentive to save for the future.

If we could go back in time, Roosevelt would have never created the retirement system in the first place. Had taxes stayed low and people were allowed to save and be rewarded for it, the wealth of retirees would be far more vast than it is today. We cannot go back in time and reverse history, but we can build something better for the future.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.