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Mandatory Savings Programs : Jeffrey A. Miron
9 paragraphs found.
"Low-income insurance simultaneously addresses all of the standard justifications for government intervention in private savings and retirement decisions."

Yet the justifications for government intervention in savings and retirement decisions are not compelling. To the extent there is a role for government, mandatory savings programs (not to mention Social Security) are far more interventionist than economic analysis suggests is necessary. The arguments for a government role suggest instead that the maximum desirable intervention is narrowly targeted, low-income insurance.


Most importantly, myopia does not justify creating a mandatory savings program. The goal of helping the myopic can be accomplished with a low-income insurance program. Such programs use funds from general revenues to provide a minimal income to those beyond a certain age. By so doing, these programs both protect the profligate against the effects of their myopia and insure that everyone contributes to helping such persons.


A second possible justification for government intervention in savings and retirement decisions is that low-income persons cannot save enough for their retirement because their income during working years must be spent entirely on necessities. There are certainly some persons in this category, but again low-income insurance is a far better targeted response than a mandatory savings program. Indeed, for persons who cannot easily save for retirement, mandatory savings programs are a particular burden since they reduce disposable income during working years.


The third standard justification for government intervention in savings and retirement decisions is that, even in the absence of myopic or low-income households, some people experience bad luck and see their wealth fall drastically near retirement. Since these risks are significant at the individual level but far smaller at the aggregate level, society can reduce these risks by sharing them across individuals. Again, private mechanisms can mitigate this problem: by saving intelligently, purchasing life, medical, and accident insurance, and relying on relatives or charities, most persons can protect themselves against the worst-case scenarios. But even if this is not the case, policy can address this problem via low-income insurance; nothing as expansive as a mandatory savings program is required.

Low-Income Insurance is not Perfect, But It's Better

The claim here is that low-income insurance simultaneously addresses all of the standard justifications for government intervention in private savings and retirement decisions. Low-income insurance guarantees a minimum income in retirement for those who undersave; it protects those with low earnings; and it provides insurance against bad luck. In addition, low-income insurance for the elderly already exists in the form of Supplemental Security Income, the federal program that provides low-income insurance for those elderly not eligible for Social Security. Thus, no new bureaucracy need be created.


This does not mean that low-income insurance is problem-free. It requires sufficient taxation to pay the guaranteed income, and this taxation is likely distorting. And if the guaranteed level of income is too high, such insurance will induce substantial numbers of households to reduce their work effort so as to qualify for the guaranteed income. These considerations suggest that the income guarantees must be modest. So long as this is the case, any distortions caused by the taxation will be modest, as will the disincentive effects on labor supply. And most mandatory savings plans include low-income insurance for the poorest savers, so those costs are a given in any case. Most importantly, by limiting government intervention to low-income insurance, policy can avoid the additional negative consequences of mandatory savings programs.


In addition, the message society sends by operating a low-income insurance program is very different than that sent by operating a mandatory savings program. For all but the very poor, the message is that people must live with the consequences of their actions, even if these are unpleasant. It is true that some persons will take advantage of a low-income insurance program, even if the level of guaranteed income is low; that is indeed a cost of such a program. But at least this approach is the minimal intervention necessary to accomplish the stated objective of helping the myopic, the poor, or the truly unlucky.


But even that conclusion is debatable. The comparison between a mandatory savings program and Social Security depends not just on the basic differences in structure but on the degree to which either program distorts economic decisions. By phasing in a higher age of eligibility and means-testing of benefit receipt, Social Security's ill effects on the economy could be reduced substantially while simultaneously converting Social Security into low-income insurance. The bottom line, therefore, is that for those who wish to eliminate the negatives of Social Security, the most natural goal is to phase it out, not to replace it with a mandatory savings program.