Private Savings 1

How can we ensure that Americans will have sufficient private

savings for their retirement?

Economic Perspectives and Public Policy

Seth Greek

Rollins College, ECO 404

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Abstract

The purpose of this paper is to look at retirement savings and income in the United

States. Currently, about 20% of Americans do not save any of their income (Vasel, 2015). The

Social Security program, established to provide and supplement retirement income, is projected

to run out of funds at some point in the next century if legislative changes are not made (Social

Security Administration 2015). It is apparent that there is a retirement problem; it exists now,

and there are high chances of it getting worse in the future. This paper will discuss solutions to

this retirement problem, arguing that it is necessary to increase private savings so that more

Americans can retire. To do so fairly and justly, each economic perspective – the Left, the

Center, and the Right – will be considered. This paper will evaluate each economic perspective’s

values, basic beliefs, best practices, and evidence used in decision-making, to arrive at

conclusions that would be held by an economist of that perspective.

Introduction

Retirement – it’s a topic of many important discussions in both the public and private

spheres. It is the dream of almost every man and woman to be able to live a life of leisure

without work. Human physiology also necessitates this dream. Every person, if he lives long

enough, will be required to give up employment at some point due to old age. Retirement is an

issue of human weakness (in more ways than one), personal finance, and public policy. It’s an

issue of private property protections, economic stability, and even inequality.

Before moving forward, it is necessary to establish some basic definitions in order to

eliminate as much ambiguity and confusion as possible. Retirement is the point at which an

individual can cease employment for the rest of his life. To retire, an individual will need some

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way to pay all of his bills – an income of money – as he will no longer have employment. For the

sake of simplicity, all sources of money to pay bills during retirement will be referred to as

retirement savings.

So for this paper, people will be separated into two categories: those who have access to

enough retirement savings to pay their bills during retirement, and those who do not. From this

division the policy question for this paper arises: How can we ensure that Americans will have

sufficient savings for their retirement? It’s been established that each individual must have

enough retirement savings (of some type) to retire and still be able to pay his bills. On a

macroeconomic level, there must be sufficient national savings allocated in such a way that each

American has access to at least the amount of money that he will need to live. National Savings

is understood to be a sum of public savings (which is funded by taxes) and private savings

(Piketty, 2013). Thus there are two different sources of savings that might help to answer the

policy question.

Public sources of retirement money are not typically considered savings in

macroeconomics. In the traditional sense, Americans pay taxes to the government, who then

spend that money in different ways, such as providing retirement income to those in need. Taxes,

less government expenditures, equals public savings. However for the sake of simplicity once

again, this paper will assume that tax money paid to the government is not immediately spent.

Instead, it must be “saved” for at least some period of time. So when the government needs to

allocate retirement income for Americans, it will use the public savings that are funded through

taxes.

These public savings are well known as social programs like Medicare and Social

Security. They are not actually savings programs, but they do provide money to retirees so that

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they can pay their bills, so they will be considered public savings. Medicare is a health insurance

program for people age 65 and older. It is funded by a trust fund managed by the U.S. Treasury.

The trust fund is funded with a payroll tax of 1.45% up to an income ceiling of $118,500.

(Medicare.gov, 2015).

Social Security is often discussed when looking at retirement issues in the United States.

The Social Security Administration began in 1935, when the Social Security Board was signed

into law by President Roosevelt. It has since evolved to its current state. Today, Social Security

is funded in a similar manner to Medicare. It is funded by a trust fund that is managed by the

U.S. Treasury. Workers pay a Social Security tax of 6.2% up to an income ceiling of $118,500,

which finances the trust fund. Americans at retirement age (currently 66 years of age) can begin

receiving retirement income, which is based on their income that they received while they were

working. (Social Security Administration, 2015b).

This paper will make the assumption that the issue of retirement savings will need to be

handled without the utilization of these public savings programs in their current state. The reason

for this is simple. In A Summary of the 2014 Annual Reports by the Social Security and Medicare

Boards of Trustees, it is stated that “Neither Medicare nor Social Security can sustain projected

long-run program costs in full under currently scheduled financing, and legislative changes are

necessary to avoid disruptive consequences for beneficiaries and taxpayers.” (Social Security…

2015). Figure 1 provides a visual description of when the different trust funds are projected to

run out of money:

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Figure 1

OASI: Old Age and Survivor’s InsuranceDI: Disability Insurance

HI: Hospital Insurance

Source: Social Security and Medicare Boards of Trustees, 2015

The purpose of this paper is not to criticize any particular program, perspective, or point

of view. Instead, it is an attempt to look for solutions to the current retirement issues. Since the

“public savings” programs mentioned above are unsustainable in their current state, this paper

will move forward mostly considering private savings retirement solutions, though public

solutions will come into play later on for certain perspectives. This leads to a new and improved

policy question: How can we ensure that Americans will have sufficient private savings for

their retirement? But the current question is still quite vague and unclear. What exactly fits into

the category of private savings? And what level of savings should be deemed as sufficient?

It’s already been established that for this paper, retirement savings will be any source of

money that can be used to pay bills during retirement. Private savings is all income that is left

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over after a person’s, household’s, or business’ taxes and bills have been paid. Private savings is

positive net wealth, and net wealth can be increased over time.

Wealth can take many different forms. Wealth, in the form of cash, can simply be placed

into a savings account at a bank. Wealth can be invested in a variety of ways. It can be invested

in real estate. It can be put into different investment vehicles like stocks, bonds, commodities,

mutual funds, and many others (I am not going to spend too much time defining these investment

options. What is important to know is that wealth can be invested, with the hope that a good

investment will be made, and the wealth will grow over time). And of course wealth can just be

kept as cash. Wealth is saved in a variety of different ways. It can be saved for different reasons,

such as making a large purchase like a car or a house, or taking a family vacation. However for

this paper, the purpose of saving up wealth will be for retirement. People save their surplus

income so that at some point, they will be able to cease working, retire, and still be able to pay

their bills.

Of course it is possible that an individual can have “employment” even after they’ve

“retired”. Many people have established themselves as business owners or experts in their field,

allowing them to earn an income while putting forth little time and effort, without being

traditionally employed. But for the purpose of this paper, these established experts and business

owners will simply be assumed to be wealthy, in that they have enough savings to retire. Just as

the average individual might work, be paid, and build up savings for retirement, the business

owners and experts have worked and earned knowledge and experience, and those things will

also provide money to pay bills during retirement.

Moving forward, private savings will be any type of wealth, or source of wealth, that can

be turned into cash to pay bills during retirement. Private savings will be cash, savings accounts,

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investments, or any type of knowledge or expertise that will allow a person to retire, work very

little, and pay his bills.

Now, it will be helpful to define the amount of private savings required to retire. The idea

of retiring comfortable can be very vague, as some people might wish to travel the world. Some

people might wish to move somewhere new, retiring at the beach or in a different country. Some

people might wish to shower their grandchildren with gifts and vacations. There are countless

ways in which retirement can be lived out. To avoid the inherent complexity in this discussion,

this paper will only attempt to define an estimate of the minimum necessary to survive in the

U.S.

The Massachusetts Institute of Technology (MIT) Living Wage Calculator estimates the

cost of living for all 50 states, as well as all counties within those states. This cost of living

calculator measures the amount of money necessary to survive at a certain standard of living.

MIT takes into account things like food, healthcare, housing, transportation, taxes, and other

necessities to estimate the amount of money that will be necessary to live in a certain city or

state. Taking a basic average of the calculator’s state results, it is estimated that an individual

needs an income of about $20,000 per year to maintain a sufficient standard of living in the

United States. For a household of two, it is estimated that they will need an income of about

$30,000 per year to maintain a sufficient standard of living (Glasmeier, 2015). These figures of

$20,000 per year for an individual and $30,000 per year for a couple will be a basic benchmark

to establish an “adequate” retirement income. This, of course, is the most basic minimum, but it

is necessary to avoid over-complexity.

With these figures, it can be quite simple to quickly and roughly estimate how much

savings that a person or household would require to meet the basic cost of living standard. To

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calculate this, extremely conservative values will be used, so that only a minimum benchmark

can be established. For example, if a person or household had $1,000,000 in private retirement

savings, it would be quite easy to earn an annual rate of return of 5% on that money (Epperson,

2012). This would yield an annual income of $50,000. Even after taxes, at a rate of 20%, there

would still be $40,000 left over, which is still well-above the minimum costs of living in the

United States, and the principle investment would never be touched. Another way of looking at

this is according to life expectancy. The Social Security Administration expects a man or woman

that has reached the age of 65, to live, on average, to the age of about 85 (give or take a year or

so, with women projected to live slightly longer than men) (Social Security Administration,

2015a). A Gallup Poll in 2014 reported that the current average age of retirement in the U.S. is

62 (Rifkin, 2014). For the sake of easy, conservative math, that number can be rounded down to

60. Based on life expectancy, an individual retiree would need at minimum $20,000 per year for

about 25 years, which comes out to $500,000 (not invested, without any growth) These are very

rough estimates, done simply for the sake of getting a feeling for the amount of money that is

necessary to retire. $1,000,000 and $500,000 are huge sums of money, and this paper is not an

attempt to give investment or retirement advice. The figures shown above are simply an attempt

to explore the current retirement atmosphere in the United States in order to accurately propose

policy prescriptions later on.

Economic Contexts

The Federal Reserve Bank of St. Louis reports that the current personal savings rate (the

proportion of savings to income after taxes) in the U.S. is 5.5% (Federal Reserve Bank of St.

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Louis, 2015). Figure 2 reports that the U.S. personal savings rate has been steadily declining

since the mid-1970s, where it peaked over 16%:

Figure 2

Source: St. Louis Fed

The National Institute on Retirement Security (NIRS, 2015) reported in 2010 that the

median retirement account balance for heads of household ages 25-64 in the U.S. was only

$3000. Even for retirement age individuals, ages 55-64, the median retirement account balance

for households with retirement accounts is only $100,000, which alone would not be enough to

live off of during retirement. Refer to Figure 3 for a description of median retirement account

balances:

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Figure 3

Source: NIRS, 2015

Retirement USA, a national initiative working towards a new retirement system, reports

that “Half of people age 65 and over receive income of less than $18,337 a year from all sources.

One quarter have incomes of less than $11,139” (Retirement USA, 2015). And to make matters

worse, the Employee Benefit Research Institute reports that current life expectancies are

expected to rise by about a year over the next decade (Greene and Monga, 2013) see figure 4 for

a summary by the Wall Street Journal:

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Figure 4

Source: Greene and Monga (2013)

Why are Americans having trouble saving for retirement? What are the economic and

political contexts that might be influencing human action leading up to retirement? And how

might our understanding of psychology and behavior help to explain the current retirement

problem? The answers to these questions will be discussed through the next sections, looking at

taxes, debt, and human behavior. And once the policy issue is more thoroughly understood, it

will be easier to address it from each perspective.

Taxes

The first way to understand private savings is by looking at disposable income, which is

the amount of income money that is left over after an individual has paid his taxes. When an

individual’s disposable income increases, he will spend some of it, and he will save some of it.

There are two ways to increase disposable income. The first way is to increase total income, such

as by getting a raise or a better-paying job. The second way is to pay less in taxes. This paper is

not meant to be a guide on getting a raise or getting a better-paying job, but it is important to

understand that things like education and training have a strong effect on increasing disposable

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income and private savings. The three economic perspectives, however, will be very concerned

with U.S. tax law, as it is a macroeconomic tool that can greatly influence private savings.

The Internal Revenue Service (IRS) reported in 2008 that overwhelming complexity is

one of the biggest obstacles that the IRS must overcome. They reported that the U.S. Internal

Revenue Code is currently over 3.7 million words. The code is also growing rapidly, tripling in

length since 1975. The tax compliance industry is estimated to cost the U.S. economy about 14%

(almost $200 billion) of all aggregate tax income that the United States brings in (IRS, 2008).

But with the goal of just understanding private retirement savings, it will only be helpful to

understand a few specific parts of the tax code. The next few paragraphs will be concerned with

income taxes, real estate taxes, the capital gain tax, and the taxation of retirement-specific

accounts.

The U.S. income tax is progressive, in that the tax rate will typically increase as income

increases. In Figure 5 found below, the marginal tax rates according to income are summarized:

Figure 5

If your filing status is SingleTaxable Income  

But not Marginal Rate  Over ---      over ---

$0 $9,225 10%$9,225 $37,450 15%

$37,450 $90,750 25%$90,750 $189,300 28%

$189,300 $411,500 33%$411,500 $413,200 35%$413,200 and over 39.6%

Source: TPC 2014

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The marginal rate system can be a bit confusing at first, but it is easily explained. For example,

an individual might make $50,000 per year. That individual would pay a 10% tax rate on the first

$9,225 that he makes, which would result in an income tax of $922.50. The individual would

then pay a 15% tax rate on the next portion of income, from $9,225 to $37,450 ($28,335 total, so

the income tax on this portion of income would be $4,233.75). Lastly, the individual would pay a

25% tax rate on all income made in excess of $37,450, up to $90,750. Since the individual made

a total of $50,000 in the year, he would pay the 25% rate on $12,550, which is $3,137.50. So, in

total, the individual will have paid $8,293.70, or an effective tax rate of 16.5%.

Almost all forms of property are taxed by local governments in the United States. It

would take an entire study to properly discuss property taxes, since each county has different real

estate values, valuation methods, and tax needs. For a quick summary of median property taxes

in the U.S., refer to the map, Figure 6 below:

Figure 6

Source: Tax Foundation (2011)

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It’s important to understand that property taxes affect private savings in multiple ways. First,

people might invest in real estate as a form of retirement savings. If property taxes are high, it

might push people away from investing in real estate, or vice versa. Also, a homeowner will

have to pay property taxes on his home. This lowers disposable income, which in turn might lead

to lower savings.

Assets can also be taxed, if they result in a capital gain (if the asset is sold for more

money than was paid for it). Capital gains can occur with all types of assets, such as real estate,

stocks, and even antiques. In a 2015 discussion of capital gains and losses, the IRS reports that

most capital gains will be taxed at a rate of 15%, though individuals in the highest tax bracket

will pay a capital gains rate of 20% (IRS, 2015a). Capital gains taxes are important to understand

because they affect how individuals will invest and save their money.

There are an incredible amount of investment options that are specifically for retirement.

Some are taxed differently than others, so only a few of the most popular programs will be

discussed below in Figure 7:

Figure 7

Type of Account Contributions Growth Retirement Distributions

Other Features

401K, 403B Contributions are made pre-tax

Not Taxed Retirement Distributions are taxed

Employer Matching Potential, Distribution Rules

Individual Retirement Account (IRA)

Pre-tax Not taxed Retirement Distributions are taxed

Distribution Rules

Roth IRA Post-tax Not taxed Not taxed No Distribution Rules

Source: IRS (2015)b

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There are just a few features of these retirement-specific accounts that should be remembered.

First, the way money is taxed will affect the type of account that an individual might use for

retirement saving. Second, the way people feel about the future might affect what type of

account they will use. And third, employer-related programs, like employer matching, or even

just having an employer that encourages the use of a retirement account, can encourage people to

save for retirement.

Debt

High levels of household debt can also affect the savings patterns in the U.S. To

understand these potential effects, it can be helpful to know a little basic accounting first. An

individual’s net wealth is equal to his assets (like cash, savings, a house, cars, and other

belongings) less any liabilities he might have (like a home loan, credit card debt, or student

loans). So when people have debt, they will need to pay off that debt at some point using their

assets. Debt can also prevent people from building up savings in the first place, since making

payments means there is less income left over to save.

The Federal Reserve Bank of New York reports that U.S. Household Debt is currently at

$11.83 trillion, though it has decreased almost 7% since its peak in 2008 (The Federal Reserve

Bank of New York, 2015). The Consumer Financial Protection Bureau estimates that student

loans outstanding totals about $1.2 trillion, and it’s been growing rapidly in the past decade (the

outstanding loan balance increased by 20% between 2011 and 2013) (The Federal Reserve Bank

of New York, 2015). Rising debt is not necessarily a negative indicator. More student loans

means more people are getting an education, and earning a higher wage in the workforce.

Household debt can mean that lots of people are buying houses as well. Thus, rising debt can be

either a positive or a negative, so the statistics are open to interpretation.

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Human Behavior

One might argue that saving for retirement is simply an issue of rationality. It makes

sense that people should exercise a bit of self-control and planning in order to have enough

money to retire later on. So why don’t more people do it? There have been many studies that

attempt to answer this question. In a paper in The Journal of Economic Perspectives, Benartzi

and Thaler suggest that people are too passive, in that they aren’t willing to take the time to learn

about retirement plans, or adjust their current strategies (Benartzi and Thaler, 2007). In The

Economic Journal, Moav and Neeman suggest that people neglect saving and opt to spend more

so that they can send false signals of wealth to their peers (Moav and Neeman, 2012). The point

is that simple, “rational” retirement planning is not as simple as it might seem. Even if an

individual does have a plan, they have to stick to that plan for decades. Emotions, peers,

emergencies, and human desires all play important roles in our ability to save for retirement. And

on top of all of those human factors, taxes, debt, and income also factor into the equation.

In the next section, the three major economic perspectives – Left, Center, and Right –

will be explained and evaluated, in order to properly address the policy question: How can we

ensure that Americans will have sufficient private savings, so that they can at least afford

the minimum costs of living during their retirement?

Economic Perspectives

It is almost impossible to properly debate a topic without first having a strong

understanding of the values and beliefs of those who disagree with you. It is with this in mind

that this section is written, because it is of the utmost importance to be able to understand all

arguments, from differing perspectives. Once this understanding has occurred, a proper,

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constructive, and educational debate can occur. There are three major economic perspectives

today: the Left, Center, and Right. This section will discuss each of these perspectives,

evaluating their values, beliefs about market systems, theories and methods, and how the types of

evidence that they use to approach policy problems. For a summary of the following evaluation,

refer to figure 7:

Figure 7

Left Center Right

Values and Norms Democracy Egalitarianism Exceptions for personal

responsibility Rights of future citizens

Efficiency Freedom tempered by

fairness Private Property

constrained by efficiency and market failures (if necessary)

Personal responsibility for the able, others need temporary/lifelong help

Freedom Private Property Rights Personal Responsibility

(Absolute responsibility is ideal)

Basic Beliefs about appropriate roles of government and market mechanisms

The market is possibly the best way to allocate resources, but often fails

Government should intervene to meet certain goals, the market can meet others

Unstable financial system, with a history of causing macroeconomic failures

Market mechanisms are default unless failures are proven

Unstable financial system, causing macroeconomic failures

Governments can fail just as markets do

Guidance with macroeconomic policies is necessary

Market system is self-correcting, relatively stable, and is the best alternative

Government failures - Minimum government involvement in economic life is best

Pareto Optimality

The main types of economic thinking used to analyze the problem

Structuralist (Institutions)

Focus on conflicts of interest among groups

Statistics/econometrics, comparing and evaluating past policies

Theories of human behavior

Reductionist/Atomistic A priori deductivism –

models with incompletely rational, yet maximizing agents with constraints

General Equilibrium Theory

Econometrics Theories of human

behavior

Reductionist/Atomistic A priori deductivism –

models with fully rational, maximizing agents

General Equilibrium Theory, but market failures are not so disruptive

The main types of evidence used to support the ideological view

Cost-benefit analysis to compare government-related solutions

Econometrics when results are consistent with theory. Alternatives to

Quantitative study leads to conclusion, then comparison of market vs. government alternatives

Econometrics when results are consistent with theory. Market allocation is preferred

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greed/market allocation are preferred

History of market failures, growing inequality from 1975 to the present

The most likely policy proposal

Focus on equality – tax breaks for poor to save money.

Savings incentives with focus on the poor

Pressures on investment/development to create dynamic capitalism

Focus: using limited resources most effectively

Focus on rewarding good behavior

Governmental options - tax breaks to increase saving

Market options – savings incentives

Tax cuts making saving as inexpensive as possible

Laissez Faire optimal

Values and Norms

The Left perspective holds the values of democracy, egalitarianism, and consideration

for the rights of future citizens. At the center of the Left’s values is the belief that all humans

deserve at least basic human rights and opportunities. The Left believes that democracy, in all

aspects of life, is the best way to ensure that all people will have equal opportunities and rights.

Democracy should be reached in all spheres: political, social, and economic. Since all people are

equal, all people should have a similar say in political and economic decisions. The Left takes

major issue with things like growing inequality (shown below in figure 8) because it shows

evidence that true democracy is not taking place.

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Figure 8

Source: Gordon (2014)

Couple growing inequality with the recent study, “Testing Theories of American Politics: Elites,

Interest Groups, and Average Citizens”, which shows strong evidence that ordinary Americans

have almost no influence in affecting policy decisions, while the wealthy and business interests

exercise lots of control over policy decisions (Gilens and Page, 2014). The Left sees a significant

democratic failure in the United States. They argue that in order to ensure equality for all people,

in the present and in the future, true democracy needs to be maintained in all public spheres. The

Left also argues that since there are inherent inequalities in society (unequal distribution of

wealth, social status, and the basic fact that each person is different), it will sometimes be

necessary to have exceptions for personal responsibility. A person’s work ethic and planning are

not all that decide his success in life. Family wealth, living environment, intelligence, and

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countless other factors will play important roles in each individual’s life. As a result, some

people will be better off than others, and the Left argues that this should be corrected for as much

as possible to ensure a certain level of equality.

The Right holds the values of freedom, private property rights, and absolute personal

responsibility. The Right argues that there is nothing more important than the individual.

Individuals have different strengths and weaknesses, and each has the ability to live a successful

life in his own way. The Right often would refer to the American Dream, stating that anyone can

be incredibly successful with hard work and recognition of their strengths and advantages.

Entrepreneurs without college educations can turn into multibillionaires in the U.S. The average

Joe can work hard for 40 years, save consistently, and retire happily with his family. The Right

argues that individual freedom and personal responsibility must be encouraged and held in the

highest regards. Private property rights must be strictly enforced, so that individuals can trust that

they will be able to reap the benefits of their hard work. When all individuals are allowed the

freedom to pursue their own interests, knowing that they must take personal responsibility for

their own actions, the economy (and society, as a whole) will reach its best, most efficient level.

The Center holds to the values of economic efficiency, freedom, and private property

protections and personal responsibility. However the Center holds that freedom, personal

responsibility, and private property protections are not absolute – there are certain situations in

which they must be tempered or constrained. The Center has arisen out of the conflict between

the Left and the Right, and as a result its values closely resemble those of the other two

perspectives. The Center would consider them to be realistic, in that it is most focused on what is

most efficient. It recognizes many of the inherent inequalities in humanity (intelligence,

community, wealth), and admits that life is unfair. However it also recognizes the importance of

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individual freedom. Personal responsibility is very important for the Center, but they still

recognize that some people should not be held personally responsible for the situations that they

have been born into, such as the sick, disabled, elderly, or otherwise disadvantaged. Private

property protections are great at encouraging lots of people to work hard, but the Center also

holds that in some situations it might be necessary to find other ways to reach maximum

efficiency and avoid market failures. Since the Center is most concerned with efficiency, it is

willing to pull from the values of both the Left and the Right. The Center would argue that it

looks to be the most unbiased, taking the best values and arguments and doing what is best for

the largest majority of people.

Basic Beliefs about Appropriate Roles of Government and Market Mechanisms

The Left argues that the financial market is unstable, and it has a well-defined history of

causing market failures. The Left does admit that the free market can be quite efficient at

allocating resources, though it often fails. The Left recognizes that it will be unrealistic and

inefficient to completely disregard the free market, but it refuses to adhere strictly to the free

market. As a result, it is absolutely necessary that the government should intervene to meet

certain goals and avoid market failures. The Left argues that the free market produces a lot of

negative externalities, or costs that affect people who were not involved in the initial activity.

These negative externalities are market failures that need to be corrected for with government

policy and regulation. The Left holds that government regulation and intervention, while costly,

are less costly than market failures left unchecked.

The Right believes that a free market without any outside intervention is most efficient,

in that it is self-correcting and relatively stable. The Right argues that when all individuals are

given the freedom to pursue their own self-interests within the market, the market will reach a

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point of equilibrium, where resources are allocated most efficiently. This is accomplished based

on the concept of Pareto Optimality. Individuals will make transactions when they benefit from

them. If a transaction was going to leave one person worse off than when he started, he would

not participate in that transaction. Now imagine if an entire economy acted in this manner. Each

person would only make transactions that he benefitted from, and each person would stop

making transactions when they would no longer benefit. The economy would reach Pareto

Optimality, where no more transactions can take place without making one person worse off than

before. In this Pareto Optimal economy, each person partakes in profitable actions, and refuses

costly actions, and the economy establishes an efficient equilibrium. The Right argues that

government intervention prevents individuals from reaching Pareto Optimality, either by

preventing people from making beneficial transactions, or by causing people to make

transactions that will leave them worse off. When this occurs, the Right argues, individual

freedom and responsibility are neglected, forcing individuals to act in unnatural ways.

The Center exists between the Right and the Left. They hold that free market

mechanisms are costless. They are costless initially, at least. The Left would argue that they

cause negative externalities, which can be even more costly than the cost of government

intervention. Since free markets are costless, and they’ve had a history of efficiently allocating

resources through supply and demand, the Center will often default to free market solutions. But

in instances of macroeconomic failure, where historical data provides evidence that market

failures and negative externalities have occurred, the Center will consider government

intervention solutions. The Center argues that certain areas of the market have a history of

instability and failure, such as the stock market, with a history of crashes, or the banking system,

with a history of liquidity crises, and macroeconomic guidance and regulation are necessary to

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avoid future large-scale failure. However government action should not be used lightly. Any

government program is costly, and there must be sufficient, convincing, historical-data-

supported evidence for the Center to select government solutions instead of free market

solutions.

The Main Types of Economic Thinking Used to Analyze Problems, and the Main Types of

Evidence Used to Support the Ideological View

The Left looks at economic policy issues through the lenses of structuralism and

institutionalism. These theories essentially state that human behavior and culture is closely

intertwined with the institutions (structures) that exist around them. Humanity cannot be

understood without first considering institutions and structures. A person is born with unique

qualities, but he is also shaped by his family, community, culture, and government. These

intertwining factors create trends and similarities that lead to deeper truths within society. The

Left argues that the structures and institutions within the United States have led to inherent

conflicts of interests that create inequality, a lack of true democracy, and unequal access to

opportunity. For example, the Left argues that the upper class, as an institution, has interests that

conflict with the lower class. The wealthy are rational individuals who wish their wealth to grow.

The wealthy will also tend to employ other less wealthy people, so they have a direct influence

on the lives of the lower classes. They have little to no interest in passing on the wealth growth to

the lower classes, because it would be economically irrational to give away money to other

people. As a result, conflicts of interests might prevent the entire economy from enjoying

economic growth. The Left sees these conflicts of interests all throughout society, where those

with less power and influence will suffer while those with more will not. As conflicts of interests

Private Savings 24

are uncovered, and the understanding of human behavior is expanded, the Left strives to take

corrective and preventative steps to create a more equal and democratic economy.

The Left will also often use statistics and econometrics to evaluate past policies. In the

grand scheme of things, the economic Left is a fairly new movement. Institutional inequality can

be found everywhere in history. The battle-strong ruled the weak, the masters controlled the

slaves, or the lords dictated the actions of the peasants. Only in the last few centuries have the

lay-people began to gain true equality and opportunity. The Left uses statistics and econometrics

to argue against Right policies, attempting to prove that valuing freedom and personal

responsibility above all else is costly and inefficient. The Left will also point to recent policies

(typically from Western Europe) that have shown evidence of the benefits of Leftist ideology.

The Left especially likes to draw attention to the growing levels of inequality from the 1980s to

the present. Mainly Right-focused policies have been prescribed during that time period, and

economic data shows that, without a doubt, inequality has grown.

It’s also important to point out that the Left, just like any other perspective, is biased

towards their own perspective. The Left uses cost-benefit analysis in their decision-making, but

only to compare between government/intervention-related solutions. The Left believes that the

free-market has provided enough evidence of failure, so they will typically neglect free-market

options. The Left will also only utilize econometric data when the results are consistent with

their theory.

The Right, in contrast to the Left, is reductionist and atomistic, in that they look to

reduce the economy to its simplest terms. The Right has done this using a priori deductivism.

“A priori” is Latin for “what come before”. When brought together with deductivism, which is

an attempt to build upwards from theory, it’s apparent that the Right favors a basic, widely-

Private Savings 25

applicable theoretical model from which it can build upwards. The Right accomplishes this with

two theories: agency and the General Equilibrium Theory.

The Right uses the concept of agency to reduce the economy to its most basic elements.

An economy is a group of people, interacting and participating in transactions. There are two

parts to an economy: the people and the ways that they interact. Agency is concerned with the

people within the economy. The Right takes people and reduces them to rational, maximizing

agents. These agents are assumed to be fully rational, in that each agent has a perfect

understanding of his own tastes and preferences, and he will act in the most cost-effective

manner to accomplish his goals. An agent makes well-informed decisions because he has perfect

information about the market. An agent is only concerned with reducing costs and maximizing

benefits, as it pertains to his tastes and preferences.

The General Equilibrium Theory builds upon the idea of agency, and explains that a

natural price, or price equilibrium, will be reached as rational producers supply products and

rational agents demand them. These forces, supply and demand, occur without any outside

intervention, to bring an entire economy to an efficient equilibrium.

It’s important to note that the Right does not view these theories as scientific fact, but

instead as models that allow for the best understanding of why most things happen the way that

they do. The Right holds that the economy, with millions of individuals, who each have

countless preferences and emotions that complicate their preferences, would be impossible to

model. Instead, the Right opts to say that since most people act rationally most of the time,

perfect agency can be assumed.

When looking at policy proposal, the Right’s decision-making process can actually be

quite simple. Cost-benefit analysis doesn’t have a role to play, as the Right’s suggestions to most

Private Savings 26

policy issues is to reduce the government’s intervention in that arena. The Right will take into

account econometric data, but they are very biased (just as the Left is) towards only looking for

results that are consistent with their theory. When the data shows that market allocation is the

best option, the Right will use it to their advantage.

The Center is also Reductionist and Atomistic in its approach. It begins its a priori

deductivism approach by assuming an agency model and the General Equilibrium Theory,

just like with the Right. However for the Center, their agents are assumed to be incompletely

rational, and maximizing with constraints. This is an attempt to have their models account for

potential irrationality and non-maximizing activities that are actually predicted by the theories of

human behavior that are being developed.

The Center will use econometrics and well-rounded quantitative study. With the results,

they can use cost-benefit analysis to compare market and government alternatives to policy

problems. Market alternatives will be the default if evidence is not convincing, but convincing

evidence will lead to government alternative prescriptions.

Perspectives, Contexts, and Prescriptions

In summary, this paper has evaluated the retirement savings issue in the United States. In

their current state, public savings cannot be trusted to provide consistent retirement income in the

long run, so this problem will require a private savings solution, at least for this paper, since

revamping Social Security is a whole different topic. Issues such as taxes, household debt,

human weakness, and the different types of retirement accounts available are important factors

that the different economic perspectives will consider in the next section, as they look to tackle

the retirement savings problem according to their own specific values and beliefs. First the Left

Private Savings 27

will be considered, followed by the Right and then the Center. Refer back to the perspectives

chart in Figure 7 as necessary, as it will be helpful to make connections between the

values/market beliefs and the policy prescriptions.

Left Perspective, Contexts and Prescriptions

Recall that the Left is most concerned with the values of equality and democracy. The

Left interprets the retirement savings problem as a result of conflicts of interest between the

upper and lower classes. The upper class, wealthy citizens will never have trouble retiring. It is

only the lower class that will be unable to retire because they have inadequate savings. The lower

class will have to work far into their old age so that they can support themselves.

The Left is especially troubled by the high levels of household debt in the economy.

Larson’s article in The New Labor Forum argues that student loan debt (and other debt) is

preventing the lower class from moving forward in the economy. He argues that student loan

debt is almost enslaving, in that it creates a vicious cycle that holds the lower class down in

poverty. (Larson, 2014). Hudson, in a paper for the Levy Economics Institute of Bard College,

builds upon this when he states that debt and interest payments essentially cause the lower class

to be enslaved to the upper class. He describes the current age as a “neo-serfdom” where the

upper class enjoys a “free lunch” while the lower class works to pay off their debt (Hudson,

2012).

The Left sees a market failure that needs to be addressed. The financial system, in its

current state, has failed to allocate resources properly to those who need it. As a result, the

American lower class is unable to save enough money to have a secure retirement. The Left sees

negative externalities that have resulted from this market failure – inequality is increasing at such

Private Savings 28

a rapid pace that democracy is disappearing (Figure 8). The upper class citizens are able to enjoy

their retirement while the lower class is withheld the fundamental right of retiring in their old

age. The Left sees an economic structure that is setting up the lower class to fail. And as the

lower class is unable to save money, they will also be unable to pass on wealth to the next

generation. The Left sees current citizens and future citizens lacking fundamental rights.

The Left will use government intervention to attempt to correct the retirement savings

market failure. They will direct their focus towards the lower class, as the upper class already has

an excess of private retirement savings. The Left will begin by seeing a failure of the free

market. They will then ask the question: How can the government most efficiently allocate

retirement savings so that all Americans can enjoy at least a basic level of retirement

comfort?

The best way to understand the Left’s solutions to the wealth and retirement savings

problem is by studying the recent work of Thomas Piketty. In his book Capital in the Twenty-

First Century, Piketty proposes a solution to growing inequality. He argues that since wealth is

consistently growing so quickly, it would make sense to implement a wealth tax. This tax would

vary from about 1% to as high as 10% (a millionaire would pay a lower tax rate while a

billionaire would pay a higher tax rate). Piketty argues that since wealth grows so rapidly, those

without wealth will continue to miss out on economic growth and inequality will continue to

worsen (Piketty, 2013).

The Left would see Piketty’s wealth tax as a great solution, as it would allow the

government to reallocate resources where the free market has failed. Increased tax revenue from

a wealth tax could be used to lessen the tax burden on the lower class, effectively increasing their

disposable income and in turn increasing their savings. Alternatively, the funds from a wealth tax

Private Savings 29

could be used to rescue and revive Social Security. A wealth tax would actively combat the

conflicts of interest between the upper and lower classes, re-allocating wealth where the free

market has failed.

There are many other solutions that the Left would consider as well, as long as they

focused on equipping the lower classes with the tools they need for success. The Left might

support government sponsored finance/budgeting education for the lower class. Or the Left

would also support specialized retirement plans for the lower class, with tax exemptions or tax

credits for those who utilize retirement savings accounts. The Left would focus on investing

heavily in the lower class, creating upward pressure that would create a more dynamic capitalist

market.

Right Perspective, Contexts and Prescriptions

The Right’s approach to this policy issue will focus on its value of freedom and personal

responsibility. The Right will see the current retirement troubles in two ways. First, they will

argue that it is a summation of many individuals who have not been personally responsible in

planning for their future. They believe that if an individual chooses to neglect his future, then he

should suffer the consequences. Second, the Right will argue that the government interference in

the market for retirement savings has disturbed the natural order. In a completely free market,

people would have no expectations of help or assistance from the government. Without a

government safety net for retirement, most people would plan for their retirement on their own.

The Right sees savings as a one of the tools that the economy uses to self-regulate. In a

paper for the Foundation for Economic Education, Patterson points out that saving is a way of

channeling money to those who will actively spend it. And when that money is moved to those

Private Savings 30

who will spend it, the economy will enjoy long-term growth. Patterson also argues that

consumption produces activity, but not necessarily growth. Savings is a way in which the

economy naturally grows (Patterson, 2013).

The Right’s policy prescription would be mainly focused on taxes. Income taxes, real

estate taxes, and capital gains taxes have made saving money too expensive. Income taxes lower

disposable income, so individuals can’t save as much. Real estate taxes make real estate more

expensive to own. Capital gains taxes decrease profits from investments. The Right argues that

the key to fixing increasing retirement savings is to make saving money as cheap and costless as

possible. In a perfect world, the Right would have absolutely minimal taxes – only enough to

enforce private property protections. In a more realistic world, the Right would look to decrease

taxes as much as possible. Decreasing taxes would make saving cheaper for all citizens, lower

and upper class, so the Right would be treating all people equally.

In a tax and budget bulletin for the Cato Institute, Edwards and Christian discuss

removing barriers from Roth IRA accounts (Edwards and Christian, 2002). They suggest making

these retirement accounts more accessible, making them less retirement-specific and more

savings-specific, since taxes and barriers can be intimidating and discouraging. In another piece

for the Cato Institute, Viard criticizes the current U.S. tax code for double taxation (Viard, 2014).

There are multiple ways in which money is taxed twice. One way is that income is taxed when it

is earned, and then when that income is invested and grown, it is taxed again. Another way that

money can be doubly taxed is with businesses and dividends. A business will pay income taxes

on its earnings. Then if it pays dividends to its shareholders, the shareholders will pay capital

gains taxes on those dividends. In both of these instances, taxes are collected twice on money

that has only been earned once. The Right sees the tax code as inefficient and overbearing. In

Private Savings 31

order for retirement savings to be increased to sufficient levels, the Right will look for ways to

minimize tax burdens on retirement savers.

The Right would also appreciate any solutions that the free market offers for increasing

positive saving behavior. One such market solution is reported in a paper by Biafore in Better

Investing. Biafore discusses a program called “SaveUp” that tracks spending and saving habits. It

rewards people with credits when they perform financially responsible tasks like paying off

credit card debt or increasing the balance in their bank account. Credits can then be redeemed for

gift cards or to enter lotteries for larger winnings (Biafore, 2012). SaveUp is a free market-

supplied solution to incentivizing and increasing savings, proving that the free market will

always supply natural solutions to policy issues.

The Right might also consider Social Security. In a 1997 paper for the Cato Institute,

Feldstein argues that Social Security should be eliminated. Doing so, he states, would increase

private savings and allow individuals to pursue better returns on their wealth. Feldstein argues

that Social Security is an inefficient way to allocate retirement savings, adding that Social

Security prevents people from getting a competitive rate of return on their wealth (Feldstein,

1997). The program also has administration costs to consider. Eliminating Social Security would

avoid the program’s potential long-term demise, or it would avoid the inevitable debate that

would come with rewriting the Social Security laws.

The Right will focus on freedom and personal responsibility, protecting private property

as much as possible to incentivize people to save as much as they can. The lower the tax burden,

the more people will be willing to save. And when people are saving more, the economy can

grow naturally, with everyone benefitting equally.

Private Savings 32

Center Perspective, Contexts and Prescriptions

The Center sees the current lack of retirement savings as a signal of inefficiency in the

market. While the Center supports the wealthy and their freedom to continue to build wealth,

they also question the fairness in having 50% of Americans at risk of retiring without sufficient

savings. The Center will not specifically blame this problem on personal responsibility or market

inefficiency, because in reality they are probably both partially to blame. For the Center, it is

most important to simply admit that there definitely is a retirement problem in the U.S. The

Center will then begin comparing market solutions against government solutions, weighing out

the costs and benefits of each to arrive at the most efficient solution. The Center will first look at

market solutions, since they are the cheapest to implement and the most cost-efficient to

maintain.

In a paper for the Center for Economic Policy Research, Baker advocates a default

savings program, where individuals would automatically be enlisted into an income contribution

program (like a 401K) without having to opt in. Baker argues that low income individuals are at

an inherent disadvantage when it comes to saving for retirement, and he concludes that a

voluntary default program like the one suggested above could raise retirement income in the

bottom two quintiles by 15-20% (Baker and Rosnick, 2011). Remember that half of Americans

have less than $18,337 annually in retirement income, so an increase of 15-20% could bring a

substantial amount of Americans above or closer to that number.

Baker and Rosnick’s plan is corroborated by Madrian and Shea, who in 2001 studied the

effects of automatic 401K enrollment plans. They find that under automatic enrollment,

employees will not only continue to participate and contribute to their retirement accounts, but

they will also maintain the default contribution amount instead of opting to reduce it (Madrian

Private Savings 33

and Shea, 2001). This study is important because it shows that retirement plans can be slightly

changed to encourage people to save more. Doing so is not unfair towards anyone, as people are

still allowed to make their own choices regarding saving and planning.

It’s also important to consider how people think and respond to experiences. In a paper

for The Journal of Finance, Choi et al discuss how personal experiences with 401K and other

investment programs will affect future retirement behavior. They find that when an individual

has a very positive experience, such as consistently high returns, they can be expected to

continue to save and even increase the amount of money that they save (Choi et al, 2009).

In a 2003 volume of The Journal of Economic Psychology, Watson discussed the effects

of materialistic views on savings and debt behavior. Watson finds a negative relationship

between materialism and saving (Watson, 2003). The Center would take this into consideration

when trying to increase retirement savings. Initiatives like budgeting and finance education could

work against an individual’s materialistic views and propensity to save. The problem with

education is that it typically requires government intervention, which can be potentially

expensive and difficult to implement. The previous suggestions (automatic enrollment 401Ks,

enrollment rewards, and loyalty benefits) could all be implemented easily within the market. But

finance education would have to be proven quantitatively that it is more rewarding than it is

costly.

In a recent paper for the Brookings Institute, Gale et al argue that addressing the growing

student loan problem could be very helpful in increasing retirement savings. They find that high

student loan balances will influence career selection, and they will decrease home ownership and

retirement savings. In the paper, they suggest higher education reform as a solution. Lowering

Private Savings 34

the cost of education with tax credits or financial aid grants, or implementing more income-based

repayment programs could increase private retirement savings in the future (Gale et al, 2014).

The main obstacle for the Center to overcome will be finding enough quantitative

evidence to support their government-related solutions. Market solutions like automatic

enrollment in retirement accounts or employer-supplied financial education would be fairly low-

cost to implement and offer promising results. Government solutions, on the other hand, promise

rewards but at a higher cost. Convincing quantitative data, showing that retirement sources will

be allocated efficiently and effectively to those who need it, will be necessary for the Center to

utilize government solutions.

Conclusion

50% of Americans’ annual retirement incomes are less than the national average cost of

living (RETIREMENT USA). The Federal Reserve Bank of St. Louis reports that the current

personal savings rate is just 5.5%, which is not enough for an individual to build up sufficient

retirement savings. CNNMoney reports that about 20% of Americans are not saving anything for

retirement. The Right sees freedom and responsibility failures, as well as government failures in

this policy problem. The Left sees market failure as the root of the retirement problem. They

argue that institutional inequality is creating downward forces on the lower class, which will

continue until the government takes steps to properly reallocate resources. The Center sees

efficiency problems in the market for retirement. It is unfair and economically inefficient that

50% of Americans might be unable to meet even a basic cost of living with their retirement

income. The Center recognizes that something must be done, regardless of the cause of this

problem.

Private Savings 35

It’s important to know that the retirement problem discussed in this paper is less a current

problem than it is a potential future problem. Social Security will provide retirement income for

those who need it for a majority of the next century. This paper is a recognition of future troubles

that could result from a failure of the Social Security Program. The Left, Right, and Center

prescribe solutions, momentarily ignoring Social Security, to increase private savings and allow

more Americans to retire comfortably. By evaluating the values and beliefs of each perspective,

a more constructive debate is possible and probable. As a result, a variety of solutions have been

contributed. Automatic enrollment 401Ks, tax reductions, and financial education have been

prescribed to increase private retirement savings; each proposal has its merits and its costs. The

most important thing to remember is that each economic perspective, in its own way, strives to

maximize economic efficiency and help people to succeed.

Private Savings 36

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