Sessions’ savings plan draws fire from economist
By Eric Fleischauer
Legislation proposed by U.S. Sen. Jeff Sessions, R-Mobile, would provide every U.S. citizen with a $1,000 savings account at birth and require the individual to contribute 1 percent of his wages, and his employer to match that amount, until age 65.
In an editorial meeting at The Daily last week, Sessions called the Portable Lifelong Universal Savings accounts a necessary way to increase dwindling retirement savings. He said he intends to introduce the legislation in the near future.
“The savings rate has fallen below zero the last two years,” Sessions said. “The only other time that has happened was in the Depression. People are going to retire with nothing but Social Security. That’s a tragedy.”
The plan, by a man who traditionally has been one of the most conservative in the U.S. Senate, has a conservative economist puzzled.
“My gut sense is that you have a so-called conservative Republican increasing the amount of money that the government forcibly takes from us,” said Chris Westley, an associate professor of economics at Jacksonville State University and an adjunct scholar at Auburn-based Ludwig von Mises Institute.
In 2005, according to Census records, there were about 4.1 million people born in the U.S., so the annual price tag of the initial deposit would be about $4.1 billion. Sessions has said he would not raise taxes to fund the accounts, instead reducing “unnecessary expenditures.”
“How will it be paid?” asked Westley. “Will the federal government print the money? Where will it decrease spending? That’s the question.”
Sessions said the $1,000 initial contribution is his ideal, but politics might require him “to accept much less.”
Account holders could not access the money, which would be exempt from creditors, until age 65, at which time they could withdraw 10 percent annually. The accounts would not count against eligibility for federal benefits.
“This would be your account, your money,” Sessions said. “It wouldn’t be subject to creditors. It wouldn’t disqualify you from food stamps because you couldn’t access it. ... It educates people to the power of early savings and the power of compound interest.”
Account holders would have choices — as determined by a board within the Department of Treasury — on how they could invest the money. Sessions said he expects the options would include a government securities fund, corporate bond funds, a fixed-income investment fund, a small-cap stock fund and an international fund.
A default “life-cycle” option, which would automatically shift assets from high-risk to low-risk funds as the account holder ages, would be available “for a person who doesn’t want to fool with it.”
The worker’s contribution would be withheld pre-tax, with the mandatory employer match being tax deductible. The mandatory contribution would apply only to the first $100,000 of a worker’s annual wages. Taxes would be withheld from the amounts withdrawn at the account holder’s income tax rate at that time.
Westley said the contribution from the employer is largely a fiction, as employers will pass the cost to employees in the form of lower wages or reduced hiring.
The main impediment to personal savings, Westley said, is the mandatory contribution to the Social Security system. A forced-savings plan, he said, does not address that problem. Paring back Social Security contributions to facilitate PLUS contributions would be a positive, Westley said, but adding to mandatory deductions is a negative.
Sessions said he is not necessarily against tweaking the proposed legislation to permit reductions in Social Security payments by account holders.
“We would have to work our way through that,” he said. “Maybe you could just substitute it.”
Money in the accounts would pass to heirs upon an account holder’s death but would not be considered in calculating estate-tax liability.
While the $1,000 entitlement would apply only to those born beginning in 2008, the mandatory employer and employee contributions would take effect beginning in 2009 for those under 65.
Workers could contribute voluntarily up to 10 percent of their pre-tax wages to the account, as could their employers. Workers could also roll over existing 401(k) plans and IRA accounts into their PLUS account without penalty.
Sessions said that one of the main advantages to the system is its portability.
“The average American worker has had nine jobs by the time they’re 35,” he said. “In many of them, you have to work six months or a year before you sign up for retirement benefits.”
Sessions said the massive influx of dollars into the stock market would have a positive effect, tending to drive up share prices and increase capital investment.
Westley agreed, but worried about the impact on those companies not included in the list of approved funds. If more dollars go to some companies, fewer will go to others.
“I suspect that a lot of people that are already investing would transfer their portfolio to go more heavily into firms (in approved funds),” Westley said. “It may be that less capital would go into other firms.”
Westley’s main concern is one over which Sessions may have no control. The government involvement that forces workers to invest in PLUS Accounts might ultimately translate into government control over the capital markets.
“The unintended consequence here,” Westley said, “would be that the next time the stock market crashes — as it is prone to do — there will be calls for socialization of the capital markets.”
Eroding Social Security
Westley said the main advantage of the plan might be one Sessions cannot politically acknowledge: erosion of the Social Security system.
“It seems to be based on the hope that it will so outperform Social Security that it will create political demand to restrict Social Security or abolish it in the future,” Westley said.
Sessions said his plan would be an addition to Social Security, not a replacement of it.
“We need to create infrastructure for saving that transforms the American worker’s retirement,” Sessions said. “This would create savings that we desperately need as an economy and transform the retirement years of millions.”
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