If Republicans get their the way, the future of the American welfare state might start to look a lot like your retirement account. As in your 401(k)—that lovely, tax-advantaged savings vehicle that you always feel vaguely guilty for not diverting enough money into each year.
Consider the matter of health care. The GOP’s various factions still fiercely disagree about how to repeal and replace Obamacare. But they do share a unanimous desire to greatly expand the use of health savings accounts, which let people put away, invest, and spend money to cover their medical costs tax free.
Donald (or Ivanka) Trump’s child care proposal also leans heavily on private savings by creating a new tax-free “dependent care savings account.” It would work a lot like an HSA, except families would be able to use it on things like day care, after-school expenses, or even college tuition, and the government would match some deposits from low-income families.
Of course, Americans already have an alpha-numeric soup of private savings accounts to sort through. There are 529 college plans. There are Flexible Spending Accounts, or FSAs, for medical expenses, which everybody already confuses with HSAs. Aside from 401(k)s, there are IRAs and Roth IRAs to consider. It’s as if the entire conservative hive mind is made up of people who get amped about selecting the right retirement target-date fund.
But building a welfare state around these sorts of accounts would also have some profound consequences. To list just a few, it would leave lower-income working families to fend for themselves while gratuitously funneling money to the financial services industry and eroding our tax base.
Let’s start with who benefits from these things. Savings accounts aren’t particularly useful unless you have money to save, which is why tax-preferenced vehicles tend to be most helpful for relatively wealthier households. According to the left-wing Economic Policy Institute, the median family aged 32 to 61 had just $5,000 in a retirement account as of 2013; at the 90th percentile, families had $274,000. College savings accounts have offered grossly unequal benefits as well: Among Americans on the bottom half of the income distribution, only 0.3 percent of families had a 529 in 2013, and the average balance was just $3,800, according to the Federal Reserve. Among the highest earning 5 percent of families, 16 percent had an account, and the average balance was $152,000. HSAs have also tended to work out best for high-income employees, as Ron Liebman wrote at the New York Times last week.
As these accounts multiply, they also create competing priorities. Do you save for retirement in a 401(k), or put money into a 529 for your child’s education? Do you add to your HSA, just in case illness strikes, or put cash in your Ivankacare child savings account? If you’re wealthy enough, it might not be a question—just max out your contributions to one account, then start adding to another. But if your family takes home $45,000 a year, you have to choose among these concerns.
Some people might snark that making those sorts of decisions is just what it means to be an adult. But in the end, all of us are guessing when it comes to our future financial needs, and life tends to make a mockery of our carefully laid plans—even when they’re crafted with the sage advice of a high-priced financial adviser. Asking people to look at a crystal ball and pick between health care and college savings is sort of inherently absurd.
That brings us to another classic problem associated with these accounts: They shift the risk of something going wrong from society onto the individual. Conservatives, who love to preach the gospel of personal responsibility, may see this as a feature, rather than a bug. But there’s not much you can personally do if the stock market crashes after you retire or the year your child heads to college.
These failures might be acceptable if private savings accounts delivered on their policy promises. But they don’t. The rise of 401(k)s hasn’t made us into a nation of attentive savers; instead, we’re heading for a retirement crisis as just 32 percent of Americans are putting money into workplace retirement accounts. Health savings accounts are supposed to bring market forces to bear on medicine, by encouraging people to shop around before paying out of pocket for basic services and doctors’ visits, while relying on high deductible insurance plans for truly catastrophic events. But that doesn’t seem to happen. Instead, recent research has shown that employees who use an HSA and high-deductible coverage combo just skip care altogether to avoid spending money.
So who does win out from the proliferation of private accounts? Fidelity Investments and Charles Schwab, for starters. A major selling point of these tax-free vehicles is that families can invest their savings in stocks or bonds and let the returns compound. Of course, that means more cash pouring into the pockets of mutual fund managers and financial advisers who stand prepared to help poor, befuddled families sort and prioritize their jumble of accounts. Conveniently, the Trump administration appears to be ready to gut the Department of Labor’s fiduciary rule, which required retirement advisers to act in their clients’ own best financial interests, rather than direct them into products that earn the advisers higher commissions.
One might almost say that Republicans are trying to rewrite the social contract in such a way as to maximize the profits of the financial services industry.
Emphasizing private accounts could also set the stage for major changes to the tax code. Many conservatives would love nothing more than to end taxes on capital gains. But doing so is hard, since cutting taxes on wealthy stock and bond investors isn’t politically popular, and because it would cost the government a lot of money. Shifting more stocks and bonds into tax-advantaged savings accounts would remove them from the tax base, reducing the government’s revenue capital gains, and making it cheaper to finally kill off taxes on investments altogether one day down the line. To be clear, I have no idea whether any conservatives have actually gamed this process out that far, but it seems like an obvious long-term strategy. You whittle down the tax until it’s small enough to drown it in a reconciliation bill.
Tax-preferenced savings accounts haven’t always been a conservative pet project. In the past, they’ve been a fondly regarded object of bipartisan consensus, the sort of thing that Bill Clinton used to champion. But at a moment, it seems to be the GOP carrying the torch forward, since the idea fits more neatly into an ideology where individuals should all bear their own risks, and high earners should pay the least amount in taxes. Unless you happen to be a mutual fund manager, it’s a pretty ugly vision of the future. After all, a welfare state that doesn’t help people who have trouble saving or pick them up when disaster strikes isn’t a welfare state at all.