Viewpoints : How to Pay for the S&L; Bailout : Thrifts: The huge cost could be financed without higher tax rates by ending the breaks for tax-deferred individual retirement accounts and Keogh plans.
One consistent feature of the savings and loan crisis, from the interest rate crunch of 1981 to the thrift bailout law of 1989, has been Uncle Sam’s steadfast refusal to pay for it.
Through most of the 1980s, the costs of failed thrifts far exceeded the resources of the S&L; insurance fund. Short of funds, federal regulators just rolled the problem over, using guarantees against future losses and accounting gimmicks that hid the damage. Or, they simply let sick and sometimes corrupt thrifts stay open for years.
Last year, in the thrift bailout law, President Bush and Congress finally put up lots of money--nearly all of it borrowed. “Let our children pay for the mess we created” seemed to be the philosophy.
This borrowed money strategy will more than double the cost of the problem. The General Accounting Office estimate of $500 billion over the next 30 years is less than half actual S&L; cleanup costs--and more than half interest.
It’s time to pay the piper. With the need to reduce the federal deficit and pay for military operations in the Middle East, and with the threat of higher taxes, we must give tax loopholes the same hard look they got in the 1986 tax reform debate.
Two tax breaks that don’t pass muster are tax-deferred savings plans: individual retirement accounts (IRAs) for employees, and Keogh plans for the self-employed.
IRAs are “another tax avoidance device that raises the federal deficit without any convincing evidence that it accomplishes its purposes,” says Henry J. Aaron, a prominent tax specialist at the Brookings Institution. One of our basic national economic problems is a low savings rate, Aaron notes, and IRAs have done virtually nothing to solve it.
The Employee Benefits Research Institute in Washington estimates that IRA and Keogh plans held $494 billion in assets at the end of 1989. Ending and taxing those plans in 1991 or 1992 would raise at least $125 billion, almost equaling the $150 billion of expected S&L; cleanup costs through next year, not counting interest expenses. Ending IRAs and Keoghs would also permanently cut the federal deficit by about $10 billion per year, according to the Joint Tax Committee in Congress.
There are three main reasons IRAs and Keoghs don’t do their job of getting people to save money that otherwise would be spent.
* People without enough income to save don’t save in IRAs. About two-thirds of American jobs pay $25,000 or less. IRAs are simply not an alternative for most of the workers who hold these jobs, though they could get tax deductions for contributing to IRAs. For instance, only about 12% of workers making $20,000 to $25,000 in 1988 made IRA contributions, and IRA participation falls even lower as income drops further. This is true even though many lower-paying jobs don’t offer pensions.
* People put money in IRAs and Keoghs that they would save anyway, often by taking money out of non-IRA savings. In 1982-86, the heyday of IRAs, IRA and Keogh contributions and earnings rose to almost 60% of personal savings nationwide--while non-IRA savings plummeted. With all the hoopla that IRAs had in those days, never did more than 25% of workers in the $25,000 to $30,000 income bracket make tax-deductible IRA contributions, while more than 50% of workers earning over $50,000 did.
* Savers are also consumers. A tax break for saving leads many people to spend more, not save more. This may explain IRA’s dismal history during the 1980s. From 1982 to ‘86, when all employees could take tax deductions for IRA contributions, the savings rate fell! Since the 1986 Tax Reform Act, when IRA deductions were limited to people with no pension at work or with incomes below certain levels (basically, $25,000 for singles, $40,000 for married people filing jointly), the saving rate has risen!
Some people, in between those who can’t afford to save at all and those who can easily afford to save, are motivated in part by IRA tax breaks to put money away, explains Jane G. Gravelle, senior economist at the Congressional Research Service. But their saving is dwarfed by the amount that IRAs add to the federal deficit, she says. The deficit is a form of negative saving, and is as much a part of the nation’s poor savings performance as low personal savings, she adds.
While the deductions for IRA contributions were cut back in 1986, earnings in IRA plans remain tax-deferred until retirement. Yet, relatively few people in any income bracket are making nondeductible contributions just to take advantage of the deferral.
There is no fairness in any of the tax subsidies for savings: IRAs, Keoghs, 401(k)s, pensions and life insurance. Why should pension interest, dividends, capital gains and employer pension contributions be tax-free or taxed less than the earnings from your job? Why should retirement savings be taxed less than your current pay, and less than nonretirement savings? Why, in a free country, should Uncle Sam pay anybody to save?
Looking back since 1982 at the growth of the economy, consumer spending led the way more often than did business investment, especially in the two strongest years, 1984 and 1987. Both spending and investment are essential to a sound economy. The best tax policy is to treat both equally.
The current threat of recession makes it all the more essential that we eliminate useless tax loopholes to finance the S&L; bailout and reduce the deficit. Raising tax rates would be inviting a deep, 1982-like recession because such a move would take money out of consumer hands and slice business earnings. To the extent that people spend rather than save the money freed up from IRAs and other plans, there would be a sorely needed spike in consumer spending.
Here’s how ending IRAs and Keoghs would work. Each bank, mutual fund or other company handling IRA or Keogh accounts would contact the savers, who would choose whether to keep investing the amounts left after taxes are taken out, or to receive all or part of those amounts. If a saver chose to keep investing the whole amount, just enough of the investment to pay the taxes would be sold. The company would withhold the taxes at the saver’s marginal tax rate for the previous year (15% or 28%). Of course, penalties for early withdrawal would be dropped. The process would take 12 months, with each saver assigned a month either alphabetically or by lottery.
It’s easy to imagine millions of savers, egged on by the companies that handle their IRAs, opposing this proposal. Their complaints will boil down to this: “You’re taking away my savings!”
That is completely false. What Uncle Sam would be doing is collecting taxes that are already owed but have been deferred. Sure, the deferrals have value because they are really interest-free loans from the government to savers until retirement. But almost every holder of an IRA or Keogh will pay substantial taxes during retirement on the money that he or she receives from those plans. (At current tax rates, probably most people will pay 15%.) What ending these tax subsidies would really do is tell people what part of their artificially inflated savings balances is theirs, and what part is Uncle Sam’s.
And it would accomplish one more thing. It would tell foreign and domestic investors that at least we have decided to pay rather than borrow to fix a major national problem.
