Hey Feds, here’s a free policy recommendation to help fix the economy: enact a three to four year program permitting people to prepay their debts with pretax dollars that would otherwise be used to make their tax-exempt 401(k) contributions. Current annual 401(k) contribution limits are $16,500 per person age 49 and under, and $22,000 per person age 50 and older ($33,000 and $44,000 total, for a husband and wife). On a national scale, the potential amount of debt that can be eliminated is enormous, particularly if the program continues for several years.
Here’s why this is a good idea:
There’s essentially no loss to the Treasury, because those amounts aren’t currently taxable anyway. While the funds are ultimately taxed when taken out after retirement (presumably at lower rates because the retiree isn’t working any more and is in a lower tax bracket), and this represents some loss to the Treasury on a time value basis, the benefits to the economy from a quicker recovery will mean greater overall tax revenues and savings in government programs.
Stocks overall aren’t going to appreciate in value for the near future and there aren’t many real "growth" opportunities in this market available to the typical American participant in a 401(k). Americans in the know are pulling funds out of stocks, which are just going down or oscillating in the same sickening range of depressed values, and putting their 401(k) moneys in bonds or money market funds, which are generating returns only slightly better than the CPI at best. At worst, the huge amounts of cash being shifted into Treasuries and bonds is creating an unsustainable bubble in Treasuries and bonds that will also soon burst. On the other hand, using pretax dollars to prepay debts will save all of the future interest costs on the prepaid debt — e.g., 18% on credit card debt, 8% or 10% on a car loan over 3 years, or 6% or 7% on a mortgage with a remaining term of 24 years. This is in effect a better "return" than is available to almost anyone in this economy. These avoided costs or "savings" translate into much more discretionary income — and more for saving and investment when the economy again begins to grow — down the road.
- The prepaid debt will bring necessary cash into the banks and other consumer financial institutions.
It is difficult to obtain current information regarding cumulative annual 401(k) contributions. However, a 2005 fact sheet from the Employee Benefit Research Institute indicates that, at the end of 2003, there were approximately 42 million participants in 401(k) plans. The cumulative amount of personal indebtedness that could be eliminated through temporary authorization to use pretax dollars otherwise slated for 401(k) plans is enormous.
Americans need to shed debt, not begin borrowing even more. Instead of "stimulating" us to keep borrowing to buy buy buy, how about "stimulating" us to improve our personal balance sheets by eliminating debt so we have a future in which we can live live live?
Jeff Snyder [send him mail] is an attorney who works in Manhattan. He is the author of Nation of Cowards — Essays on the Ethics of Gun Control, which examines the American character as revealed by the gun control debate. He occasionally blogs at The Shining Wire. Read this interview with him.