GOPideas... ideas done right

A previous post discussed the need to create "American Security Accounts" with the purpose of assuring Americans that they can protect their economic security. The other portion of the "SI Agenda" is the "American Investment Account": the account that allows Americans to save for investments that they will make on behalf of themselves and their children.  Much like the "S" accounts, the investment accounts would consolidate multiple state and federal accounts into one account that could be used for a myriad of purposes.

The investment account would allow for tax-free savings that could be applied to goods and services that build assets of individuals. Funds from the account could be used to pay for enhancing intellectual assets such as primary, secondary or postsecondary education, job training classes and continuing education classes. The funds could also be used to pay for investing in physical assets, such as a first home or as seed capital for starting a new business.

A number of programs at the state and federal level attempt to accomplish these goals: 529 accounts at the state level allow for parents (or others) to save for a child's education, 401(k) accounts and some IRAs can be used to fund a first time home purchase and money in HSAs can be used to purchase certain wellness-related items (spending to improve your future health is investing too!). Also, President Clinton proposed Universal Savings Accounts with the provision that the federal government would subsidize private savings. States have also experimented with subsidized savings, for example Indiana allows for Individual Development Accounts, from which participants can fund the purchase or upgrade of a home, job training materials or the initial funding for a small business. Indiana is also home to an innovative Career Advancement Account, which is jointly funded by the U.S. Department of Labor. These accounts are available to workers who have been laid off and can be used to fund education and training expenses.

Two main issues present themselves when debating specialized accounts: how the accounts are funded and how the funds are used. The natural tendency for government is to demand that if the government provides a direct (matching funds) or indirect (tax write-off) subsidy, then the funds are directed toward a purpose the government finds worthy. This is an understandable tendency, but the current system is a prototypical example of what incremental policies in this area produce: a myriad of regulations that have the unintended consequence of deterring investment.

Investment is deterred because those within the targeted population do not have the financial flexibility to be certain that they will not need their investable funds for different reasons. On the other hand, upper income individuals who already have established financial reserves are able to garner the benefits. Consider two families who are both looking to save for retirement and each has access to a 401(k): one family lives paycheck-to-paycheck, the other have $50,000 in cash in reserve in case of illness or job loss. If both elect to save and both are struck by an unforeseen event, one family will be forced to raid their savings (and pay all penalties), whereas the other will not. Thus, the former family must either not save or risk losing their savings to penalties. This situation is a significant reason why the asset gap between rich and poor continues to grow: those with assets have the funds to take advantage of government programs, whereas those that do not have the funds cannot.

By combining multiple accounts with the caveat that the money could be used in financial emergencies, lower income individuals would not longer need to fear what would happen if an unforeseen circumstance arose. This would allow them to save in the same manner as middle and upper income individuals. Furthermore, through matching grants, the government could assist in closing the asset gap between socioeconomic groups.