Do Americans need a new retirement plan backed by the US government? It has been well documented that Social Security funds will not last long enough to support everyone who has paid into it. Retirement and security is on a lot of people’s minds – especially with next year’s presidential elections upcoming. (Note: This is not a political blog, and this is not a political article. This is an article about a retirement plan being proposed by one of the early candidates.)
Presidential hopeful Senator Hillary Clinton proposed the US government begin a new program designed to help Americans prepare for retirement. The American Retirement Account is her proposal to give middle class Americans a government subsidized, 401(k) style retirement account.
This plan would effectively give each American access to a portable 401(k) plan in which the government would offer matching tax cuts between $500-1,000, depending on income. This proposal is designed to help middle and lower class Americans save more money toward retirement. Let’s look at it.
American Retirement Account Plan Details:
- The plan would function similar to a 401(k) plan.
- Dollar-for-dollar matching refundable tax credit for the first $1,000 of savings done by every married couple making up to $60,000.
- 50% match on the first $1000 of savings for every couple making between $60,000 and $100,000, which will be phased out after that.
- Plan is portable – it can be used with existing 401(k) plans, or be run as its own plan. It can be moved with the employee, regardless of employer.
- The accounts would allow penalty-free withdrawals for major investments like buying a home and paying for higher education or to help manage periods of unemployment.
- Provide small businesses with tax incentives to provide direct-deposit into American Retirement Account Plans.
My Questions:
- Who will pay for it? Well, this is the million dollar question, isn’t it? When Sen. Clinton proposed the Baby Bonds, she didn’t have an answer for that question. To pay for the American Retirement Account, Sen. Clinton proposes the government put a freeze on the 2009 estate tax levels. I haven’t done the research on the taxes involved with this, but I hope her Presidential Campaign Committee has. This program will potentially cost billions of dollars.
- What are the tax breaks for single people? Only married couples were mentioned in her outline. By only defining contributions for married people, this plan leaves out an extremely large segment of the population.
- Is this designed to supplement, or replace Social Security? When asked this question, Sen. Clinton’s response hedged toward bolstering Social Security and bringing it back on-line. I guess that means this will supplement Social Security, but who knows.
- What is a refundable tax credit? Does the plan call for the government to put money into your account for you, or this is just another line item deduction on your taxes? Though some news reports initially referred to it as a dollar for dollar match when you make the investment, further reading leads me to believe this is actually another tax deduction.
Will the American Retirement Account work? If you run the numbers, $500-1000 per year compounded annually over 30 years is not a huge sum of money, at least not when you consider people will be using it to live off of. But, I’m not entirely sure that is the sole intent of the program.
I think part of the intent is to get people used to the idea of saving. I know for me personally, that I was more motivated to save as I watched my accounts increase in size. I think once many people realize that all they need to do is get into the habit of saving and they can make steady progress over time, more people will do it. Unfortunately, it may take a government program to get many people to realize this.
Note: I am neither for nor against Hillary Clinton, and I do not consider this a political blog. I am writing about this because I think it is an interesting idea and one that many Americans should put thought and consideration into. Your financial future is worth it.
{ 1 trackback }
{ 4 comments… read them below or add one }
I don’t know enough about the plan to be for or against it. However funding it by freezing the estate tax at 2009 levels doesn’t seems all that bad. The estate tax is set to expire in 2010. Personally I’m a fan of the estate tax. I’m not fan of large sums of wealth being passed from generation to generation without any tax. I much rather have higher estate taxes than income taxes. It’s not an estate tax is disincentive to die. But, I guess my feelings on the estate tax is a reflection of my politics…
Dong,
The tax system here in the US is just so complicated I wouldn’t know where to begin as far as reforming it. As far as the American Retirement System, right now it is just an idea that hasn’t even been proposed to Congress yet. Basically it is designed to help Sen. Clinton gain favor within her party and with voters (translation a political move). Who knows if we will ever see it or not?
I really hate to sound like a normal ignorant anonymous internet commenter. But I have to say that most of Hillary Clinton’s ideas are garbage.
I wish she was elected to identify the problems and inequalities in the US and have a Republican or moderate decide how to fix it. Income redistribution doesn’t work no matter how one tries to package it.
IMHO
Brandon J
Money for Military
Brandon,
I was definitely not a fan of Clinton’s Baby Bonds idea, which thankfully was scrapped.
I’m not sure this idea will have much more of an effect than to get more people thinking about retirement and hopefully saving, which I believe is the intent. Running the numbers, $500-1,000 per year will not be enough for people to retire on. Unfortunately, many people would think that that money, plus Social Security will be all they need and won’t save any extra.
I don’t believe this is the answer, but I also do not have the answer.