Monday, April 11, 2011

Desire to End Roth IRAs Exposes Economic Misconceptions

Gerald E. Scorse penned an opinion column in Sunday's LA Times that calls for the dissolution of the Roth IRA retirement vehicle. In doing so he demonstrates several wrong ideas about both how economics work and the ownership of wealth in general.

He first points out the differences between the Roth and other retirement accounts, including traditional IRAs, 401(k) plans and 403(b) plans (which are like 401(k)s for non-profits; for a more detailed explanation, go here). Basically, most retirement vehicles allow for savings to be invested tax free. Finds paid out at retirement time are subject to taxes. Roths require taxes to be paid up front (another way to look at it is, there's no initial tax break upon investing). However, future withdrawals are made with out penalty; no taxes are paid on withdrawals. So far, so good.

Next however, Scorse makes an ill-fated comparison to the healthcare law, referring to Roths as a "fiscal Frankenstein", a term an (unnamed) opponent of the healthcare reform bill used to describe the legislation. It's a false comparison. Government-controlled healthcare is an open-ended mandate for federal spending which will require ever-increasing revenue streams (i.e. taxes) to maintain. The funds paid out from a Roth IRA don't come from taxes. Most Roth IRAs, being investment vehicles that utilize stocks, bonds, mutual funds, and other "risk-based" investments, aren't federally insured. (Some Roths, those offered by banks, are FDIC insured for up to $250,000.) Scorse writes:
In return for little more than ordinary upfront taxes, Congress waived untold billions in future Treasury receipts. Then, too, Roths could be a drag on the U.S. economy. Since no withdrawals are required, assets can lie idle indefinitely.
Yes, they can lie idle indefinitely. So what? They can lie idle indefinitely in a savings account until the sun burns out. Should there be a cap on how long money can sit in such an account, accruing interest? Apparently so, as money sitting in an account and not generating revenue for the government is "a bit like toxic instruments on the nation's books".

That statement exposes another misconception: all money belongs to the government. The idea that Roth IRAs are somehow cheating the federal government out of receipts that it is somehow entitled to shows a fundamental lack of respect for how wealth is created. This misconception was on display last year when Barney Frank was heard explaining why estate taxes were such a great thing. Inherent in both Frank's explanation and Scorse argument above is that any money an individual keeps is a gift from the government, to be rescinded or expanded at its whim. It's the federal government's world and you're just living in it.

Scorse ends by quoting Howard Gleckman of the Tax Policy Center:
"In the long run, turning billions of dollars from tax-deferred to tax-free savings will be a huge loser for Treasury. My colleagues at Tax Policy Center figure that, through mid-century, allowing unlimited Roth conversions will reduce federal revenues by $100 billion."
Scorse uses the qualifier "nonpartisan", which always seems to mean "partisan but not for profit". The Tax Policy Center is a joint venture of the the Urban Institute and the Brookings Institute. Nonpartisan? Maybe. Left-leaning? Certainly. This is not an attempt to discredit Gleckman. But it does serve to put his perspective on taxes into a clearer context.
That context ignores the effect that a greater percentage of capital in the hands of private citizens has on treasury receipts. More money in the private sector means more money to spend on goods and services which generates tax revenues. More money in the private sector means more money in the hands of those who create wealth and jobs, which also generate tax revenues. That's the other misconception at play here: money in the hands of government and money in the hands of the private sector are essentially the same when it comes to wealth and job creation.

Roth IRAs encourage planning for retirement. They provide a way for everyone, regardless of income, to prepare for a future where there is money to support them without living on the dole. The logic that says this should be taken away inevitably increases the risk that people looking to retire must rely on the federal government to take care of them through entitlement programs. It creates a perpetual cycle in which more people need the government to take care of them, leading to a need for more government, which needs more tax receipts, and so on. Which illustrates another misconception: the government knows better how to spend your money than you do. That's the real "fiscal Frankenstein".

(Crossposted at Say Anything)


  1. Good post Jay. Another component that you somewhat touched on is the fact that money just "sitting" in a savings account or Roth IRA isn't really just "sitting" there. It is invested in companies or loaned out to individuals and organizations which also contributes to economic growth. And in turn, increased tax revenue collected by the federal government.

  2. Yeah, a commenter at Say Anything pointed that out as well. It's true that invested money (even if it's just in a savings account) is never really idle. If I had it to do over again I'd point out that the author of the original article's idea of money "sitting idle" is money that isn't currently either (a) sitting in the government's coffers, or (b) generating tax revenue. Making money for a private individual doesn't count.