Most observers agree massive aid for ailing households and failing institutions is necessary, even if it inadvertently rewards those most culpable.
But what about people who did not buy into foolish notions that home values only rise while rates on exotic loans will never reset — those who sought the American dream through careful saving, rather than pursuing housing bubbles and siren songs of easy credit?
Savers likely will pay a disproportionate amount of the bailout costs, after already getting steamrolled in recent years through the Federal Reserve Board's low-interest policy that helped create the crisis. And current wisdom surmises the Fed may cut rates to combat further weaknesses in the economy. For savers, here's what the low rates have done.
- They have spawned a weak dollar, bringing higher living costs in an international economy and inflating away the purchasing power of nest eggs (a problem that gargantuan amounts of new federal debt will exacerbate).
- They have required people to set loftier savings goals, since the eroded buying power of accumulated dollars, along with interest rates that are expected to remain low, will mean more principal is needed to meet higher interest income targets.
- They have made reaching sufficient account balances tougher, because lower nominal and real interest rates earned must be offset by bigger out-of-pocket contributions.
Policymakers bemoan low household savings rates while continuing to punish frugality. How to atone for their shabby treatment of determined savers and help these prudent people reach their financial objectives? Most savers would cheer increased real interest rates, but such action is off the table for now.A move that would be both significant for savers and politically feasible would be to increase deposit maximums for Roth individual retirement accounts, whose unshielded contributions earn returns throughout the saver's life with no eventual income tax bill.
Higher limits also could apply to traditional IRAs, for which deposits are tax-sheltered and withdrawals of deposits and earnings are taxed. But the savings-minded are especially fond of Roth IRAs, which protect against uncertain future tax regimes.
Granted, standard annual deposit ceilings have risen from $2,000 to $5,000 in the decade since William Roth shepherded enabling legislation through Congress, and inflation-based future increases are planned. Bumping the limit even higher would provide timely and especially useful benefits for those who have saved of late. After all, the higher limit technically would apply to all citizens, but it is the saving class that would have money available to take advantage.
Additional lump-sum contributions also might be allowed, to reward not having added to the debt market woes. This benefit could be higher for older working savers, whose options have been squeezed from both ends — Roth IRAs (and often even traditional ones) were unavailable in their younger days, and they are approaching retirements that will end their rights to make further shielded contributions.
It seems unfair to restrict IRA deposits to "earned" income, since Washington remains all too happy to assess income tax on interest and other investment returns.
Yearly income limits for unrestricted Roth contributions (currently $160,000 for joint filers) also should be raised substantially or eliminated.
The straw that easily can put a household over the limit is some hard-won taxable investment income added to two moderate salaries. Because Roth deposits do not reduce incomes on which current taxes are owed, tax receipts would not decrease in the short run. Less revenue would enter IRS coffers over the long term, but those holding the federal fiscal reins would have time to — and would have to — adjust. They obviously already have some serious planning to do.
Current Roth IRA withdrawal rules are most lenient for retirement income or first home purchases. Why these limitations? Some restrictions might justifiably accompany tax advantages, but expanded Roth IRA guidelines should allow penalty-free withdrawals of contributions and investment returns to address other significant life issues.
This flexibility in turn would decrease pressure on already-strained credit markets. Permitted uses could include medical costs, living expenses when not fully employed before retirement age, and education for new careers — needs that will grow with technological change. The savings-minded would not overuse this privilege, since funds withdrawn could not earn subsequent untaxed returns.
In keeping with this wider scope, Roth IRAs might be renamed universal savings accounts.
Compelling cases could be made for additional policies to encourage saving: permitting USAs for children and leaving capital gains and inflation-based investment returns untaxed. Unfortunately, while promoting individual investment is especially sensible with Social Security's status more imperiled than ever, much desirable action will fall victim as needful officials covet any available pocket's contents.
The modest change we propose should be an administratively simple way to improve thrifty citizens' lives.
It also would provide a sizable and reasonably reliable source of deposit money (banks will always be trusted guardians of families' long-term savings, particularly in turbulent economic waters), increasing further the stability of a banking system finally aided by the Fed's recent decision to pay interest on required and excess reserves.
And USAs, with the features described above, should be legislatively palatable at a time when Washington ought to feel deservedly sheepish for proffering assurances to hedge funds, foreign governments, and foolhardy borrowers while American savers rightfully feel they have had "Kick me" signs taped to their backs.
