Obama's No Fan of Retirement Savings

Obama: No fan of retirement saving
by Greg Minkiw

A key feature of the U.S. tax system is the option to put some income into tax-deferred savings accounts, such as IRAs and 401(k) plans. These accounts make the tax system a bit like a consumption tax rather than a true income tax in the sense that some part of saving gets exempt from taxation until it is later withdrawn and consumed. Many economists believe that consumption taxes are better than income taxes because they do not distort the intertemporal margin between consumption today and consumption in the future. Many financial advisers encourage people to put as much as they can into these retirement accounts.

I was surprised to see that Senator Obama has, for some reason, decided not to use this opportunity. His recently released tax returns show significant Schedule C income from book royalties (about half a million dollars in the most recent year). I am not a tax accountant, but I believe he could have put a substantial part of these earnings ($44,000) into a SEP-IRA and deferred taxes on it until withdrawal. Line 28 on his tax return, however, is completely blank.

Why? I don't know. Maybe he is getting bad tax advice. Or maybe he is expecting vastly higher tax rates in the future when the accumulated savings will need to be withdrawn and taxed. As Obama economic adviser Austan Goolsbee has written, "Future increases in tax rates potentially threaten to significantly reduce the value of your retirement savings and may even mean that you should not save in 401(k) accounts at all."