America faces a difficult debt problem, mostly driven by decades of trade deficits. Our lack of a strong domestic savings base requires us to borrow from abroad, which the trade deficit reflects; even the savings by the public sector during the Clinton/Gingrich years were not enough to change that.
I propose a new, forced-contribution retirement scheme, to supplement Social Security. It would replace the “pensions” leg of the three-legged retirement stool: Social Security, pensions, and private savings.
What is it we want out of such a system? What should it do for our economy? I propose the following guiding principles for the system:
- Increase private savings, to promote external trade and the manufacturing sector (less foreign borrowing means cheaper dollar and cheaper U.S. goods).
- Encourage financial literacy.
- Encourage small-scale investment by new entrepreneurs and small/micro businesses (investment by large corporations is not a bad thing, but it cannot provide economic security for all Americans).
- Lean against speculative bubbles.
Number one is obvious: we need more manufacturing jobs if we’re ever going to pay off our national debt. Without a trade surplus, net debt reduction is impossible. Number two is also important with our large immigrant population, many of whom may not be financially literate.
Number three is especially important. We have wrung all the benefit we are going to get out of large corporations, and our society needs to admit that we cannot rely on big business to provide for all Americans. Large corporations are no longer the backstop for the poor they once were, and in modern times the savings of poor people have an uncanny tendency to flow completely outside their communities. We need to encourage small-scale local investment; not at the expense of companies like GE or Ford or Boeing, but in addition to the financing those companies need.
Point four is a common response of the American Left, who fear feeding yet more boom-bust cycles. It would be wrong to completely deny the higher returns of Wall Street, but that doesn’t mean investment houses should be given free reign, either.
The basic structure is a two-part system, that complements the existing Social Security program rather than replacing it.
Individual Retirement Accounts
Part one consists of a forced contribution system based on private, IRA-like accounts. Investment in stocks would be limited to 35%, with the rest invested in government-guaranteed debt (like mortgages, bank CDs, high-rated municipal bonds–and, yes, U.S. Treasury securities).
Microfinance That Works
Part two is an advanced version of a microfinance scheme. Every American citizen would become entitled to $1000 in annual payments (financed by either a simple tax withholding scheme, essentially a 1-year deposit, or a redistributive national sales tax), which they can use to secure a $4000-limit credit card. The interest payments would be negligible, probably in the range of 3-4%.
While many would undoubtedly use their $1000 for consumption, a significant number of people would not. Cars, kitchen appliances, home improvement, and other such investments do matter to the well-being of local communities, and improves the productivity and social capital of residents. There would be a strong incentive to use the low-interest credit card for such investments, especially among poor people of bad credit, who need cars and appliances every bit as much as other Americans but struggle to find affordable financing.
Why use such a complicated scheme, when microfinance is used all over the world? In truth, microfinance has not been a resounding success. The greatest problem is the lack of collateral; “solidarity lending” has not worked. Interest rates are so high, only the truly desperate make use of it. This discourages local investment and encourages debt-fueled consumption. Microfinance is generally not funded by local savers, which makes local businesses and producers uncompetitive relative to outsiders. The same forces that send American jobs overseas (lack of savings) apply to regional communities, too, though not to the same degree (inter-regional governmental tax transfers will even things out a bit).
The goal is to convert a small portion of current consumption into local investment, while fostering social capital in communities that need it. Even if only a small percentage is used for local investment, it could still make a big difference. By limiting the secured credit card to the four times the annual payment the system discourages unsustainable borrowing.
One of the biggest problems with forced-contribution savings and investment schemes is that private actors tend to save less in response. America’s personal savings rate is very low, and this might not be a problem. However, there is historical reasons to believe that businesses might respond by reducing profits and increasing borrowing, again offsetting the net gain to national savings.
As a guesstimate, I would say the contribution rate for the individual accounts should be set at 12-15% of income, initially ramped up in 2% yearly increments. The microfinance scheme, not being based on a percentage of income, should be indexed to inflation (or possibly wage growth, given the imperfect nature of measures of inflation).