September 12, 2018


Should Congress Enact Universal Savings Accounts? (Daniel Di Martino, SEPTEMBER 11, 2018, E21)

Republicans in Congress are aiming to revamp savings with the introduction of Universal Savings Accounts (USAs) for all Americans as part of the Family Savings Act of 2018. The bill would expand existing tax-free savings accounts such as 401(k)s, IRAs, and 529 College Savings Plans, and it would create USAs as a new type of account for all purposes with a $2,500 annual contribution limit. The chairman of the House of Representatives Ways and Means Committee expects to have the bill ready for a floor vote this month. [...]

Currently, Americans can take advantage of numerous tax-exempt savings accounts such as Individual Retirement Accounts (IRAs), 401(k)s, 529 college savings plans, and Health Savings Accounts. Each of these accounts has complicated rules governing how much individuals can contribute, and when and for which purposes they can withdraw their savings. For instance, while traditional IRAs have no income limits but require savers to withdraw their funds periodically starting at 70 ½ years old, Roth IRAs do have income limits but do not require withdrawals.

These restrictions create a barrier to saving. A survey by the Teachers Insurance and Annuity Association of America, a large financial service provider, found that the main reasons Millennials do not contribute to an IRA, beyond not having enough money to save, are that they do not know enough about them and that they are too complex. Moreover, a recent survey found that less than 30 percent of Americans know what a 529-college savings plan is, while less than 1 in 5 knows the basic restrictions associated with Health Savings Accounts.

Excessive complexity not only reduces savings particularly among young adults, as survey data confirm, but it also results in inefficiencies. Given that there are 15 types of tax advantaged retirement plans, and many other types of tax-advantaged accounts, savers change the timing of their consumption, and the amount and allocation of their savings to minimize their tax bill. Studies have shown that the complex taxation of savings not only reduces economic growth, but it also increases tax evasion and hinders tax enforcement.

Excessive complexity not only reduces savings, it also results in inefficiencies.

By contrast, USA account holders would not be hamstrung by complex rules. Universal Savings Accounts would simplify the system since they would allow individuals to withdraw their savings at any point in time and for any reason. Simplicity may increase savings among young adults, helping them benefit from the glories of compound interest early in their lives.

Now remove the contribution limit.

Posted by at September 12, 2018 7:01 AM