Academic

Batchelder on Savings Incentives

By Lawrence Solum

Lily L. Batchelder (New York University School of Law) has posted Savings Incentives with Insurance Objectives: A Bankrupt Approach? on SSRN. Here is the abstract:

This article argues that existing savings incentives with insurance objectives don?t work, and there is little evidence that they would be worthwhile from an efficiency perspective even if reformed. Their best chance at success would be if the funds were instead spent on matching contributions for saving by low- and middle-income households in a universal, opt-out saving program used to purchase government-backed insurance. But even then, a similar program without financial incentives would probably be the better approach.

The reasons existing retirement savings incentives do not work are threefold. First, existing evidence simply does not show that any group responds to them by actually saving more. This is due to a combination of asset shifting, inertia, myopia, self-control problems, and, in the case of some lower-income households, countervailing implicit taxes at confiscatory rates. Second, they subsidize the wrong thing. By failing to condition the subsidy on the purchase of insurance, they lose much of their force. Finally, they apply to the wrong people. Because existing subsidies are regressive and predominantly employment-based, those most in need of insurance are the least likely to be covered, or to benefit in any way from them.

As an illustration, we estimate that repealing retirement savings incentives would generate about $230 billion in revenue in 2010 alone at a time when we face severe budgetary challenges. It could also be used to address the widening disparities in household income. For example, the revenue generated could be used to finance an estimated rebate of $875 per person for all tax units. This would increase the after-tax income of the bottom quintile by an average of 10.3 percent, while the after-tax income of the top quintile would fall by an average of (2.2) percent.

Full post as published by Legal Theory Blog on August 05, 2009 (boomark / email).