I never know which of my posts is going to generate email. This time it seems to be my remarks in favor of add-on accounts. I’ve gotten several critical emails, which make variants of the same argument: We already have IRAs and 401(k)s. What’s the point of creating another type of account which people would have to put up new money to use? The argument continues: Unlike accounts “carved out” of Social Security, add-ons would not give people more control of their tax dollars and would not cut the total costs of the Social Security program. Add-ons would be “a new government program.”
Unlike some of my correspondents, I don’t regard IRAs and 401(k)s as “government programs” just like food stamps are a government program. I regard them as tax cuts–partial correctives to the federal government’s overtaxation of savings. So those of my correspondents who object to setting up add-on accounts because they don’t like IRAs are, I think, mistaken.
Add-on accounts could be set up so that they require new money to be put up. The old Clinton-Gore idea was that the government would match people’s savings with a tax credit. That would limit the reach of the new accounts. Iif they’re a bad idea, then limiting their reach is a good thing. If the point, on the other hand, is that carve-outs are therefore better as a way of expanding the investor class, you’ll get no argument from me–I made the point myself in the piece to which I linked earlier–but that’s a reason for preferring carve-outs, not for opposing add-ons. Anyway, there’s no reason in principle that accounts outside Social Security have to require new money from account-holders. They could be set up so that people are just investing tax credits. And there’s no reason in principle that they can’t be implemented as part of a reform package that also cuts future Social Security benefits and thus saves money–answering another objection.
Some people get concerned about refundable tax credits. That, they say, is a transfer payment, not a tax cut. I don’t see the problem. Consider two scenarios. In one, a person is paying a 12.4 percent payroll tax and allowed to invest 4 of those percentage points. His future government-paid benefits are being reduced. It’s a carve-out, so conservatives are ecstatic. In the other scenario, a person is still paying a 12.4 percent payroll tax. He can’t invest any of the payroll taxes. But he is given a tax credit against his income taxes worth 4 percent of his wages. If he doesn’t owe enough income tax to collect the credit, it’s okay: The credit is refundable. His future government-paid benefits are reduced. This is an add-on. Terrible!
But what’s the difference, other than the words we’re using to describe the situation? In either case, our worker is paying 8.4 percent of his wages into the traditional government program, investing 4 percent of wages the government used to take in taxes, and getting lower government-paid benefits. It’s just that in one case we explicitly say that he’s investing his payroll taxes, and in the other we say that he’s investing a refundable tax credit. This is worth fighting over as a matter of high principle?
I’ll close by quoting the one positive email I’ve gotten about the post:
“Maybe the best illustration of the add-on vs carve-out confusion is Pat Moynihan’s original plan from the early 1990s. He first cut the payroll tax, since he thought the Trust Fund was bogus [and] wasn’t really saving the surplus. But then said that workers could keep both their share and the employers’ share if they put it in an account. Is that an add-on or a carve-out? Technically add-on, and Moynihan referred to it as such, but it would have pretty much the same effect as a carve-out.
“Whether an add-on or a carve-out works depends a lot on how the rest of the system is balanced. My beef with AARP isn’t so much that they favor add-ons but that they want to balance the rest of the system all with tax increases. If they balanced the system with benefit cuts in return for an add-on account, it wouldn’t bother me much.” Exactly.