The newly released White House budget addresses the savings needs of ordinary Americans in a big-brother kind of way. But it does little to address our nation’s overall financial illiteracy.
In 244 pages, the Obama budget makes not a single mention of “financial education” or “financial literacy.” The budget does offer measures to beef up math education and help students finish college, both of which are linked to smarter personal money management. Still, when it comes to things like mortgages and retirement saving, this president favors the hand of big brother over initiatives that would help people help themselves.
To be fair, the president has embraced financial education at a certain level. We have a formal national strategy for financial literacy and a couple high-level commissions coordinating private and public sector financial education efforts. These groups have done a great job developing helpful consumer websites like moneyasyougrow.org and mymoney.gov. But this work is nowhere near as high profile as that of the watchdog Consumer Financial Protection Bureau, which has an education component but mainly regulates consumer financial institutions.
(MORE: Obama’s Budget Would Cap Tax-Advantaged Savings)
The Obama budget would help ordinary Americans save by making tax-favored retirement accounts more widely available and automatic. Roughly half of American workers have no workplace retirement plan; only one in 10 who are eligible to contribute to an Individual Retirement Account do so.
To fill this gap, the budget would automatically enroll workers without employer-based plans in IRAs through payroll deductions. These workers would be free to opt out. But most in such plans do not. Some would be eligible for a saver’s tax credit, further boosting what they are able to put away. Small employers would be eligible for tax credits to defray any administrative costs.
The budget helps clarify the extent to which the White House sees tax-favored accounts as a tool for middle and lower income groups. As reported here, the budget would cap the amount anyone can save in tax-advantaged accounts at around $3 million. “Under current rules, some wealthy individuals are able to accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving,” the budget states.
It remains unclear as to how this cap would be enforced, especially for folks who already have exceeded the limit. But one new detail suggests that the cap would float. It would be high enough at any given time to purchase a lifetime guaranteed annual income stream of $205,000. The White House says that amount today is about $3 million. If interest rates rise, the cap would fall.
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Also quietly wedged into the budget is a provision that would “require non-spouse beneficiaries of IRA owners and retirement plan participants to take inherited distributions over no more than five years.” This idea first appeared in a Senate Finance Committee proposal in a highway-funding bill. Now it’s part of the nation’s proposed budget.
Again, this measure takes aim at the rich, who can afford to pass down tax-deferred savings to heirs. Under current law, those heirs can then allow the savings to grow tax-deferred for their lifetime. This is a popular estate-planning strategy that would fall by the wayside if heirs were required to cash out tax-favored inheritance within five years.
For decades, lawmakers generally were unconcerned with the specifics of how folks used tax-favored accounts, reasoning that any saving is a good thing. But with these accounts having amassed $10 trillion, the pot is too large to ignore. For now, only the wealthy are earmarked to take a haircut—while others get wider access to savings. Fair enough. But taxing tax-free or tax-deferred growth is a door that will be difficult to shut once flung wide open.