Who Wants This? (A Bit of a Rant.)
I’ve written before about personal finance’s love affair with complexity. But the other day I saw a post on social media, in response to last month’s State of the Union proposal for yet another retirement savings scheme, which I would paraphrase as “Eff complicated savings account schemes. Just fund Social Security.”
It was a proverbial lightbulb moment. The post encapsulated in one post (almost) everything that is wrong with our American approach to saving for long term goals, like retirement and college.
We don’t need new, fancy tax-advantaged savings schemes for our kids’ college years. We need affordable college. (Also, high quality public schools so that families don’t have to use “college funds” for private school. Oh, and affordable childcare for the early years so that they can actually save for the future.)
The new 503A accounts — and their beloved 529 account predecessors — are an overly complex and mostly insufficient response to the problem of affording to send your kids to college. Unless you’re wealthy enough to shovel money into these tax-favored honeypots. Which is another way of saying that you likely would have saved anyway, regardless of the tax benefit — because you could.
A diversion… I was about to type “Why are 401(k) accounts so successful?” but then I realized that maybe they are not. Yes, the uptake among those who have access to them is phenomenal (Vanguard reports an 85% participation rate for its plans) and that’s a good thing. But given that the median balance for those aged 55 to 64 who are closing in on retirement is only $185,000, can that really be called a success? Are we winning when more than half of workers do not even have a workplace retirement plan?
That aside, 401(k)s are popular and we all like them. But the reason they “work” (to the extent that they do) is not because of the tax advantage. It’s because the investment comes out of your paycheck before you ever see it. (Sometimes without you even asking.)
If getting a tax advantage for retirement investing was the great motivator that people think it is, then IRA accounts — delinked from the workplace — would receive overwhelming continuous flows of funds. And yet most IRAs exist as depositories for funds that used to be in 401(k) accounts. It’s the automation (and the employer match) that counts, not the tax benefit.
And then there’s health insurance. High deductible health plans and Health Savings Accounts (HSAs) are great if you have money, and rather sucky (to use a technical term) if you don’t. They are an over-engineered contraption that does not even do the main thing that its original proponents claimed it would do, e.g., hold down healthcare spending. (I doubt anyone had a straight face when they said that.) But if you are in a high marginal tax bracket, they’re pretty sweet to use. I suspect that’s the point of them. The constituency for HSAs isn’t found in the 12% tax bracket.
We have reached peak complexity. I fully accept that complicated problems (affordable healthcare, quality public education, secure retirement) require thoughtful, nuanced — yes, complicated — responses. But public policy has become so enraptured by inefficient, regressive tax code-based solutions that it has lost sight of what the actual objectives are.
So, yes, fund your 401(k), your IRA, your 529 account, your HSA, if you can. Open that 503A account and collect your $1000. I would never suggest that you not exploit the wealth-building tools that are available to you. But don’t kid yourself that this is a real solution to the problem.
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