Sensible, Please Meet Ludicrous

The Debate on Retirement Income Security Deteriorates

Debate on retirement income security deteriorates into a fight between sensible policy solutions and ludicrous economic claims, writes Christian E. Weller.

Recent massive stock and housing market losses have vividly shown Americans that many don’t have enough retirement savings. Suddenly, retirement savings worries came to the forefront as families watched their wealth dwindle. The Employee Benefits Research Institute reported in April of this year that only 18 percent of workers were very confident that they will live comfortably in retirement, down from 27 percent last year—the largest annual drop in 18 years and the lowest level since 1993.

The numbers tell a dark tale. From 2000 to 2006, the share of private sector workers with access to retirement savings—a pension or a savings plan such as a 401(k) plan—from their employer dropped from 50.3 percent to 43.2 percent. Decreasing numbers of employers offer retirement benefits, and fewer workers participate even when they have the opportunity due to the complex decisions that are involved. Real household wealth also dropped by $3.0 trillion between the middle of 2007 and March 2008. Family wealth suffered from the triple onslaught of freefalling stock and house prices and continued increases in family borrowing.

Sen. Barack Obama (D-IL) is paying attention to these worrisome trends, while Sen. John McCain (R-AZ) is paying for attack ads that are riddled with ludicrous statements about his opponent’s proposals.

Sen. Obama has proposed several steps that would make a real difference in Americans’ retirement security. All employees who have access to a retirement savings plan through their employer would be automatically enrolled in their employer’s retirement savings plan. Employers who do not offer retirement benefits would at least give their employees the option to save in low-cost Individual Retirement Accounts, or IRAs, through easy payroll deduction. Greater access to retirement plans would then be matched with a savings incentive that would bring the biggest benefits to families making less than $75,000 a year. This type of savings incentive is very effective in getting more people to save for retirement.

Now, Sen. McCain, who hasn’t offered a proposal on retirement wealth—unless you count a massively regressive tax cut that showers nearly half of its benefits on the richest 1 percent of Americans—is accusing Sen. Obama of reducing retirement savings. His false claim centers on Sen. Obama’s tax plan. It would put capital gains and dividend tax rates below the levels of the 1990s, but above current levels, affecting only families making more than $250,000. Investments in small and start-up businesses would be exempted from capital gains taxes. Sen. McCain claims that this would somehow hurt retirement savings. This allegation deliberately misrepresents the facts, ignores mountains of economic evidence, and overlooks the likely harmful effects that Sen. McCain’s own tax proposal would have on retirement wealth.

The McCain campaign simply doesn’t have the facts straight. Retirement accounts, such as 401(k) plans and IRAs, are not subject to capital gains or dividend taxation. Sen. Obama’s proposed tax changes thus cannot have any effect on retirement savings.

Assuming the McCain campaign already knows this, their argument is that rolling back some of the Bush tax cuts on the richest Americans will reduce rates of return on Wall Street.

Economic analysts, however, have already debunked this argument. If letting the tax cuts run out is harmful, implementing them in the first place should have been helpful, which wasn’t the case. For example, researchers at the Federal Reserve concluded in 2005 that stock prices did not respond to the dividend tax cuts of 2003. If stock prices were not boosted by the cuts, they won’t be harmed by letting some of the cuts expire.

Finally, Sen. McCain’s own tax proposal will likely cause considerable harm to Americans’ retirement wealth. Senator McCain is essentially proposing “Bush on steroids,” a massively regressive tax cut that would shower even more benefits on the richest 1 percent of American families than the Bush tax cuts did. Low-income and moderate-income families won’t get the help that they need to build a better nest egg as their after-tax income would drop by a negligible 0.1 percent to 0.2 percent, according to an analysis by the Tax Policy Center.

More importantly, Sen. McCain’s tax plan would attach at least an additional $300 billion per year to the budget deficit. This would translate into higher interest rates, less growth, and fewer resources to support effective policies that would create real retirement wealth.

This is a sharp contrast to Sen. Obama’s proposal, which would reduce the expected deficits, shrink inequality, and emphasize innovation and growth more than President George W. Bush did or Sen. McCain envisions.

The country is in trouble. Voters rightfully expect to see a discussion over policy ideas to address what is ailing the middle class. Instead, they are watching a fight between sensible policy solutions and ludicrous economic claims. Families, who have been hit hard by the fallout of the housing crisis, deserve better.

Christian Weller is a Senior Fellow at the Center for American Progress Action Fund and an Associate Professor at the University of Massachusetts-Boston.

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Christian E. Weller

Senior Fellow