Republicans in Congress are aiming to revamp savings with the introduction of Universal Savings Accounts (USAs) for all Americans as part of the Family Savings Act of 2018. The bill would expand existing tax-free savings accounts such as 401(k)s, IRAs, and 529 College Savings Plans, and it would create USAs as a new type of account for all purposes with a $2,500 annual contribution limit. The chairman of the House of Representatives Ways and Means Committee expects to have the bill ready for a floor vote this month.
Presidents Bill Clinton, George W. Bush, and Barack Obama have all proposed some form of Universal Savings Accounts, which allow Americans to invest after-tax income in stocks, bonds, and other financial instruments. Part of the appeal of these accounts is that they are far simpler than other savings accounts, such as 401(k)s. USA account holders can withdraw their funds at any time and for any reason without a penalty. These accounts, which are widely used in Canada and England, may be especially helpful to young and low-income Americans. In Canada, Tax-Free Savings Accounts have resulted in increased savings among low and middle-income individuals, according to one study—and in the United Kingdom, Individual Savings Accounts have led to higher savings rates among lower income individuals.
USA account holders can withdraw their funds at any time and for any reason without a penalty.
Currently, Americans can take advantage of numerous tax-exempt savings accounts such as Individual Retirement Accounts (IRAs), 401(k)s, 529 college savings plans, and Health Savings Accounts. Each of these accounts has complicated rules governing how much individuals can contribute, and when and for which purposes they can withdraw their savings. For instance, while traditional IRAs have no income limits but require savers to withdraw their funds periodically starting at 70 ½ years old, Roth IRAs do have income limits but do not require withdrawals.
These restrictions create a barrier to saving. A survey by the Teachers Insurance and Annuity Association of America, a large financial service provider, found that the main reasons Millennials do not contribute to an IRA, beyond not having enough money to save, are that they do not know enough about them and that they are too complex. Moreover, a recent survey found that less than 30 percent of Americans know what a 529-college savings plan is, while less than 1 in 5 knows the basic restrictions associated with Health Savings Accounts.
Excessive complexity not only reduces savings particularly among young adults, as survey data confirm, but it also results in inefficiencies. Given that there are 15 types of tax advantaged retirement plans, and many other types of tax-advantaged accounts, savers change the timing of their consumption, and the amount and allocation of their savings to minimize their tax bill. Studies have shown that the complex taxation of savings not only reduces economic growth, but it also increases tax evasion and hinders tax enforcement.
Excessive complexity not only reduces savings, it also results in inefficiencies.
By contrast, USA account holders would not be hamstrung by complex rules. Universal Savings Accounts would simplify the system since they would allow individuals to withdraw their savings at any point in time and for any reason. Simplicity may increase savings among young adults, helping them benefit from the glories of compound interest early in their lives.
One of the biggest advantages of USAs is that they are available to everyone, travel with individuals across jobs, and would simplify employee retirement and healthcare benefits. Not all Americans have access to 401(k)s, and those who do but switch jobs cannot contribute to their previous retirement account anymore. This forces them to either own multiple accounts from past jobs or cash out and move their assets to their new job’s account, incurring transfer fees. 401(k)s also provide less choice for workers since employers choose the account provider and consequently what investment options are available to workers. USAs would allow account holders to choose provider and investment options, giving them the opportunity to pay lower fees, diversify more, and gain independence from their employer. That said, people are not always incentivized to save, and one virtue of 401(k)s is that employers can nudge their employees towards saving by implementing automatic enrollment and other increasingly popular behavioral strategies.
USAs are available to everyone, travel with individuals across jobs, and would simplify employee retirement and healthcare benefits.
The GOP bill takes positive steps on 401(k)s by making them available to more Americans and more flexible, and giving everyone the option to use USAs for retirement without worrying about the consequences of quitting or being fired. Still, Congress should allow employers to contribute on behalf of their employees into their USAs to provide more choice and increase saving.
Another benefit of USAs is their flexibility. The current system only allows Americans to save for goals that Congress considers important: Retirement, healthcare, and education. Yet, many working Millennials do not invest their savings in tax-exempt retirement, health savings, or college savings accounts because they have more immediate goals. The 2018 Discover Savings Survey showed that the most cited reasons Millennials saved were: building an emergency fund, vacation, holiday shopping, buying a home, and buying a car. Additionally, the survey showed that most Americans do not invest their savings in stocks or bonds, but they deposit them in saving or checking accounts that typically yield lower returns.
Everyone—especially young and low-income Americans with more immediate savings needs—will benefit from the flexibility of USAs, which allow individuals to withdraw their funds for any of their life goals rather than for government-sanctioned purposes. Congress should not waste any more time and allow Americans to save and invest in their future.
Daniel Di Martino is a contributor to Young Voices. You can follow him on Twitter @DanielDiMartino.
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