In case you are not familiar with the plan being proposed by Congress at the moment, then I’ve linked it here. But here’s a short summary from the USA Today article: currently the amount of money that an individual can contribute to their 401(k) account is $18,000 a year. The Republican Congress wants to decapitate that amount and cut it down to a measly $2,400. The initial logic behind this asinine idea may seem sound because of the way that retirement funds are taxed. The current system for 401(k)s means that if you make $65,000 a year and you contribute $10,000 to your 401(k), then when tax season comes you don’t pay taxes on $65,000, you pay taxes instead on $55,000. For a lot of people, this is a difference of a couple thousand dollars in tax payments to the IRS come April. If you aren’t allowed to put more than $2,400 then your tax bracket won’t be lowered and you’ll have to owe more to the IRS. So at first the idea for a change to the 401(k) plan seems logical. It seems like it could be a good plan to start chewing on our 20.5 trillion dollar national debt.
Let me explain (at least why I think) this could be a disastrous plan.
On the Micro Level:
Obviously the first group affected that comes to mind are individuals. On a small micro-economic level this idea understandably makes a lot of Americans feel mad and cheated. I’ll plan out my retirement in another post, but on an individual American level, if this plan were to go into place it would cut the amount people could contribute to their retirement plans. The effects of which could be this:
- People are working longer and retiring later. But,
- unless you are somebody a corporation can’t live without, there are companies that will retire you. What job do you go get then? Something less stressful – hopefully.
- If you are forced to retire and go get a menial job then, you’ve taken a pay cut and go into partial retirement. You can’t go into full retirement because the recommended 2 million dollars is not there.
- The jobs then that late teens to early 20s should be working are then filled with people that should have been able to retire, had they been able to contribute more to their retirement.
The list of effects goes on and on in my mind. People will probably tell you that there are other ways to grow your retirement account, but really, even if you only contribute $3,000 a year, which is just above the $2,400 cut off, that’s still $600 dollars a year that you’re missing out on. I’m 22, I might like to retire (even partially) at 65. (65-22)*600=25,800. $26,000 may not seem like a lot, but it’s still a chunk of money. Also, economics is all about incentives, if my 401(k) contribution is cut down so drastically, to the point where it might not seem worth it, and that I need to find other avenues, then why should I keep contributing to it? What’s in it for me?
On the Macro level:
Please remember what I just said. Because micro flows right into macro. If people’s contributions are cut, and they have no incentive to put money into their 401(k) what does that mean on the larger scale? This Republican plan is only thinking about the national debt and tax cuts for other parties. On a global scale, this is why I think it could end up disastrous:
- If you reduce the amount of money people can put into an account, then you reduce the amount of money in the market. One of the biggest reasons the Great Depression of the 1930s was so bad was because people got scared and took their money out of circulation in the banks. If you think about a forced version of this today, the amount of money forced out of the market is absolutely insane. Because when you put money in a bank, it doesn’t stay there. The bank reinvests it and pools it with other people’s money in order to make a bigger return. There are over 326 million people in the US as of 2017. Not all of them have a 401(k) obviously, but if you cut the money that’s put into the market, it seems like it’s essentially like stabbing America in the gut and letting it bleed out. We need money in the market to make this Capitalist system work. As America is the largest economy in the world, if we take the money out that banks invest all over the world it will hurt us economically.
- If Americans are restricted in the amount of money they can put into a bank for retirement, then where will they save their money and how will they do it? I can tell you the first thing that comes to mind for me is moving my money to an offshore bank account where it can earn interest. This again, is part of the macro level for the same reason as before: banks use the money you put in. Except this time if I place money in a bank in France, or the UK, or somewhere in Asia, it means that those banks of those countries will use it for their country’s investments instead.
I don’t like writing political pieces, and I never want to demonize one side of our political system – that doesn’t solve anything right now. But when plans come down the pipe from either party, I believe it is my duty as a responsible citizen to develop my own opinion and start a discussion. Because, ultimately, some ink is all it takes to change your’s and mine’s lives.
Disclaimer: I’m not an expert on anything I talk about, and please don’t mistake me for giving advice. I’m a student that wants to learn about economics which is a really important topic. Please learn with me so we can be more informed citizens.