As America hurtles toward the fiscal cliff, there’s an increasingly frantic search for ways to shore up the country’s deteriorating balance sheet. Republicans want to cut spending; Democrats would prefer to raise taxes on the wealthy. But a paper released today by Harvard and Danish researchers highlights just how much room there could be to generate more government revenue without sacrificing economic efficiency—in other words, the type of policies that both parties could conceivably learn to love. The study analyzes the responses of Danish taxpayers to savings incentives—much like those that exist for American 401(k) and IRA accounts—and also behavioral “nudges” that automatically deduct retirement savings from workers’ paychecks. It turns out that savings incentives had scarcely any impact on the rate at which Danes accumulated nest eggs, while the nudges were very effective in making people save. These findings suggest that 401(k) plans and their brethren—which cost the U.S. government as much as $100 billion a year in lost revenue—don’t do much to further their stated objective of boosting retirement savings. Even if $100 billion wouldn’t go all that far toward solving America’s debt problems, it suggests that smart approaches to eliminating or improving government programs could quickly add up to fiscal solvency—and might help the two sides find common ground. The reason we have tax shelters like the 401(k) is to change the relative cost of spending money today versus saving for tomorrow. Exempting retirement investments from taxation increases the saver’s return on his investment, so a rational cost-benefit calculation should lead most people to put something away for the future. In theory, such tax shelters should go some way toward correcting Americans’ problem of undersaving. CONTINUE READING..
Kill the 401(k)?