As New York City braces for the Republican convention, Republican strategists are trying to design an economic program that resonates with the electorate. And once again, they seem to be pushing for – guess what?! – tax cuts: making the president’s tax cuts permanent and creating an “ownership society” through tax cuts for people to put money away for retirement, health insurance, education, and other more nebulous purposes.
Who could possibly oppose an ownership society? It raises notions of responsibility through planning and foresight, a better and brighter future through savings, and homes with white picket fences in safe neighborhoods. These are laudable goals that public policy should indeed strive to help American families achieve. But the president’s proposals will not get you there. Instead, those who already own a lot of wealth and who don’t need help in accumulating more will reap large tax benefits, while middle-class families will lose important benefits.
Let’s start with a basic fact. By the end of the longest economic boom – in 2001 – more than 40 percent of families did not save, according to the Federal Reserve. Wealth accumulation was much lower for low-income families. Only 30 percent of low-income households saved any money in 2001, only 41 percent of low-income households owned their home, close to a fourth of low-income households had no financial assets in 2001, and the typical low-income household had $2,000 in financial assets. But even the typical middle-class family owned only $17,100 in financial assets and 34 percent of middle-class families did not own their home. So clearly, there is room for improvement, especially since these figures were compiled before the stock market completed its plunge and the labor market saw the first “job loss” recovery since the Great Depression.
So, why are people not saving more? The most important reason is fairly obvious: many people do not have enough money to save. According to a study released by the Economic Policy Institute in 2001, one in three working families with children could not afford all their basic needs, such as housing, health care, and food. Since then, poverty has risen and family incomes have declined. The low savings of middle- and low-income Americans during the boom years have likely continued since then.
However, working families should not expect this administration to focus its attention on boosting the best savings support program – well-paying jobs – any time soon. President Bush insists that the economy is strong and that the labor market is solid. Instead, employment growth falls far short of even minimal standards and employers had no reason to grant wage and benefit increases as long as employment growth was weak. In fact, many benefits – health insurance, pensions, and others, such as child care – have been scaled back.
Even if middle-class families magically found the extra money to save more, the president’s policies will most likely not benefit them. Under many of the administration proposals – life-time savings accounts, retirement savings accounts, health savings accounts, to name a few – households can contribute money tax free, accumulate it without paying taxes, withdraw the money without incurring taxes, or sometimes do all three at once. To take full advantage of these proposals, though, you have to be in the highest income tax bracket. However, many working families pay no or little federal income taxes because their incomes are too low, and thus, receive few benefits from this proposal. Instead, high-income families, who typically had financial assets of $364,000 in 2001, will benefit handsomely.
But the president’s push for his “ownership society” vision does not stop with showering rich people with more tax breaks. In addition, he would like to turn a large part of the country’s most successful insurance program, Social Security, into a private investment scheme. The costs to tax payers and savers will be enormous. Transitioning from the current insurance system to an untested, risky investment system would cost more than a $1 trillion in the first decade, in addition to management fees and other costs for individual accounts. Instead of building wealth, working families would pay a hefty price for the president’s ownership idea.
Saving for retirement or kids’ college education, owning a house, and putting money away for a rainy day are undoubtedly worthy goals that have been elusive to many working families. There are, however, better ways to achieve these goals. First and foremost, public policy needs to make the creation of well-paying, stable jobs a priority. With a decent paycheck, people will have the money to save more. Second, as many people will continue to struggle financially, public policy could provide some financial support to save more. This support should be targeted towards lower- and middle-income families, and not high-income earners. It could be done, for instance, through refundable tax credits or matching savings credits that are phased out above certain income limits. And finally, policymakers should follow the first rule of public policy – first, do no harm – and leave successful insurance programs, such as Social Security and Medicare, alone, instead of attempting a destroy-them-to-save-them approach through privatization.
Being well prepared for the future is an important economic goal that is too far out of reach for many working families. However, President Bush’s policies are not the path there. Following his lead would mean more tax cuts for the rich and higher costs for everybody else, which will put the goal of a true ownership society further out of reach.
Christian E. Weller is a senior economist at the American Progress Action Fund.