Universal 401k Accounts

Here's an article in today's New York Times by professor Tyler Cowen:

Just as the earned-income tax credit pays poor people to work, the universal 401(k) would pay poor people to save...By directing the benefits toward the neediest, the universal 401(k) savings plan tries to increase economic security in a cost-effective manner.

There is an obvious way to pay for a universal 401(k) plan. For every dollar spent on the universal 401(k), the federal government could spend one dollar less on Medicare and Social Security benefits...

It may seem that what the poor need is more money to spend, but the universal 401(k) plan is taking a gamble by encouraging them to lock up more savings. Perhaps support for a culture of savings and discipline is more important than subsidizing additional spending.

...A fiscally responsible universal 401(k) plan would not make everyone happy. Libertarians and conservatives would be suspicious of government-created accounts. Liberals might not like freezing or reducing future expenditures on Medicare and Social Security. But if we are looking for policy initiatives that address real-world problems and offer something to each side, encouraging low-income savings is a good place to start.

Greg Mankiw asks:

Is this proposed policy the best way to redistribute income? That is, if Congress were to allocate a certain amount of additional funds to help the poor, would advocates of these accounts, such as Gene Sperling and Peter Orszag, prefer to spend the money on these saving incentives or on, say, an expansion of the Earned Income Tax Credit?

No doubt, they would say that they would prefer to do both. But that answer just brings us back to the old question of how much income redistribution the government should pursue. The more novel question, raised by these proposals, concerns the form of redistribution. That is, holding the amount of income redistribution constant, what is the optimal way to transfer resources to the poor?

My Take: Overall, I think this sounds like a promising idea and far better at aligning incentives towards positive behavior than the current Social Security and Medicare systems. While I think there would be some political issues with this plan as future politicians use stories of the poor who need the money "trapped" in their 401k to survive and who cannot get at it, I think this idea has a lot of merit. My greatest fear would be that the 401k would be added without reducing other expenditures.

I think Mankiw raises the right question -- what is the optimal way to transfer resources to the poor? I think this idea is a step in the right direction in looking for the answer.