GOPideas... ideas done right

Monday's post discussed simplifying the programs that are designed to assist with asset accumulation into "S" and "I" accounts. The "S" is shorthand for security and the purpose of these accounts would be to enable Americans to provide security to themselves and their families throughout their lives. Today, IRAs, 401(k)s, HSAs, FSAs, 529s, etc. are all available, but once money is deposited, it must be used for the specified purpose or depositors incur fees and penalties. The is a significant disincentive to save, as (in the case of retirement accounts) participants must wait decades to remove the money or (in the case of 529s) a child must decide to attend college and to a specific set of schools. However, if a person was diligently saving for retirement and lost his job, using money from any of these accounts would incur penalties and/or significant fees.

Similar to many laws, the rules were made for understandable reasons: people with assets will try and manipulate the tax code to keep more of those assets. Thus, to ensure that money is saved for its intended purpose and within limits that do not disproportionately benefit those with the highest incomes, limits and restrictions are enacted. These restrictions are counterproductive multiple levels. First, those with assets will find ways to shelter and protect them. (For those of you that believe the government can just create rules to achieve a desired effect, I'd suggest examining how well campaign finance reform cut down the amount of money in politics.) Second, those with few assets are disproportionately at risk for incurring penalties, as they have fewer assets and if they face an emergency, their restricted account may be their only avenue for immediate assistance, even though using such an account would incur penalties. Third, conflicting and confusing restrictions can even flummox the most educated into using funds inappropriately. Can you do home improvements with HSA money? Will HSA money pay for an abortion? What about a stint in a posh rehab clinic? How about allergy meds?

Answers, in order: yes, yes, yes, no. For this reason I am losing about $1,000 this year. I signed up for a HSA and never used it. However, I still have money on it, so I was going to stock up on allergy meds for next season. In researching this piece, I found that preventing me from staying up all night sneezing and wheezing or slobbering on myself at work is not a legitimate medical expense.

By consolidating all savings into one account, an individual would be able to build a nest egg that could be used for a multitude of purposes --- and the individual could choose the most pressing need. In this example, the "Security" account would ostensibly be used to fund retirement. However, the money could be used at any time for other issues related to income or personal security. If a person was laid off and needed short-term savings, money could be withdrawn. If a medical emergency arose, money could be withdrawn. If a natural disaster struck, money could be withdrawn. Under current rules, penalties would be assessed for such withdrawals, many times compounding an already difficult situation. Yes, some right wing knucklehead will claim that his/her neighborhood is unsafe and that buying a gun is necessary to ensure his security. Almost as certain, some left wing hippie will claim that crystal treatment protects her emotional security. And they will get away with these expenses, media outlets will be outraged and politicians will complain. However, the federal rulemaking process allows hated government bureaucrats to write binding restrictions when interpreting laws and, with instructions to be inclusive, but not completely permissive, as feasible from Congress, these rulemakers can outlaw egregious abuses. (Note: Congress can always overturn a rule by passing a law, so the bureaucrats never have the final say.)

The entire goal of the exercise is to put the power of using one's savings into the hands of the individual, not based on the whims of a legislator or rulemaker. Enforcement needs to occur to ensure against grotesque abuses, but our society should be far more concerned with getting people to opt-in to saving than to ensure that those that opt-in use the money for exactly the "good" purpose dictated by the government.