The next President could make big changes to the ways Americans invest and save for retirement
So far the Presidential campaign has focused on foreign policy, immigration, health care, and, of course, the broader economy. But candidates Clinton, McCain, Obama, et al. are also being urged to tackle the financial issues that affect Americans' pocketbooks.
While the issues involved—tax incentives for saving and ways to sign up workers for individual retirement accounts, for example—may not seem like big attention-grabbers compared to the macro topics being discussed, they are vital to the financial health of the U.S. and its people.
Among the questions the next President will tackle: How should investments be taxed? What changes should be made to Social Security? How can Americans be encouraged to save more for retirement? (For more on the specific policy positions on pocketbook issues taken by Presidential candidates Hillary Clinton, Mike Huckabee, John McCain, Ralph Nader, Barack Obama, and Ron Paul, see "The Candidates on the Pocketbook Issues.")
Under the Radar
Some answers are controversial, reflecting the battles during the Bush Administration over taxes and Social Security. For example, Republicans favor lower taxes on investment income, tending to support President George W. Bush's tax cuts on dividends and capital gains and his proposals to end the estate tax. Democrats are more skeptical, with some asserting that it's unfair to tax wealth at rates so much lower than taxes on wages.
Other financial proposals haven't attracted much controversy or attention, despite the fact that they could involve sweeping changes in the way Americans save their money and prepare for retirement. One key factor is the U.S.'s dismal savings rate. Even as millions of baby boomers prepare for retirement in the next couple of decades, Americans are spending more than they sock away for the future. After drifting lower since the mid-1980s, the savings rate, according to the Bureau of Economic Analysis, is now –0.1%.
Policy experts have watched with alarm as, instead of saving and investing for the future, more Americans are sinking into debt with credit cards and outsize mortgages. At the same time, the availability of traditional pensions is shrinking and the long-term financial solvency of Social Security is wobbly.
Automatic Retirement Savings?
The timing of these problems couldn't be worse, corresponding with a wave of Americans approaching retirement: By 2010, the Census Bureau estimates there will be 81 million Americans between 45 and 64 years old, a 27% increase from a decade earlier.
Many believe Americans could start saving a lot more each year if only investing were more automatic. "Saving is not easy enough today," says J. Mark Iwry, a fellow at the Brookings Institution. "We know how to make it significantly easier."
A former Treasury official in the Clinton Administration and the first Bush Administration, Iwry is pushing ways to automatically sign up workers for retirement accounts linked to their employers' payroll systems. Rather than requiring employees to fill out paperwork, employers already can automatically deduct a portion of their employees' paychecks to 401(k) retirement plans. Employees can opt out if they want, but, at companies that have embraced automatic 401(k) sign-up, the vast majority of workers choose to save through the 401(k).
Looking for Bipartisan Buy-In
Iwry proposes doing the same for everyone, requiring all employers to sign their workers up for individual retirement accounts and using the payroll system to divert a small percentage of paychecks to retirement savings. The program would be voluntary: Employees could stop sending money to their IRAs at any point.
The leading Democratic candidates, Senators Barack Obama (D-Ill.) and Hillary Clinton (D-N.Y.), embraced and incorporated these ideas in their platforms. Republican candidates including Senator John McCain (R-Ariz.) and Mike Huckabee haven't addressed the issue yet on the Presidential campaign, but Iwry says it has "broad bipartisan buy-in" and "strong cross-ideological appeal" in Congress.
Democrats are also proposing giving extra tax benefits to low- and middle-income savers, because, they argue, wealthier Americans get most of the current tax advantages of IRAs and 401(k) plans. That might hit more Republican resistance, but Iwry is hopeful. "There is tremendous appeal to the idea that a family can build up their own nest egg and escape the vicious cycle of constantly accumulating debt and never getting ahead," he says.
Business Groups Get Involved
Republicans have spent more time focusing on lowering taxes. They argue lower taxes will boost investing, especially the taxes on dividends and capital gains. The main debate is over President Bush's tax cuts, most of which are currently scheduled to expire in 2010. Democrats would like to allow the cuts to expire for wealthier Americans to free up more money for health care reform and other priorities.
Powerful interests are pushing candidates to pay more attention to financial issues and investing. AARP, the Business Roundtable, the Service Employees Union (SEIU), and the National Federation of Independent Business—four often antagonistic groups—have formed the "Divided We Fail" coalition to push discussion of issues of both health care and long-term financial security. Although it doesn't take a particular policy stance, Divided We Fail recruits volunteers, tracks candidates' statements, and has broadcast TV ads to promote discussion of changes to America's health and retirement systems. "Clearly Americans are not saving enough for retirement," says Nancy LeaMond of AARP. "We believe the candidates have started to address these issues," she adds. But, "we don't feel they've talked about them enough."
One problem with Presidential campaigns is that they're mostly a time to talk about the "give-away side of the budget," says Eugene Steurele, a senior fellow at the Urban Institute. Tax cuts and new spending programs are popular topics in stump speeches. But Steurele, like other fiscal experts, warn that politicians must confront the U.S. government's shaky finances before it's too late.
Time to Get Tough with Lenders?
The federal government's health and retirement programs, including Social Security, Medicare, and Medicaid, are facing waves of red ink in future decades. Investors should hope the next President makes "getting the whole fiscal ship on course" a top priority, Steurele says. "These are really big items that have to be confronted."
Among other issues affecting Americans' pocketbooks, management of the U.S. economy is a flashpoint of conflict between the parties, touching on the proper ways to regulate health care and the environment. Some candidates are pushing regulators to get tougher on mortgage lenders and credit-card companies, arguing they exploit American consumers.
For investors, the most immediate effect of the next President's policies could be the direction of the stock market under his or her watch. Robert Johnson, deputy CEO of the CFA Institute, has compared stock market returns under Democrats and Republicans. Adjusting for policy of the Federal Reserve, he and colleagues found there's no difference in performance.
A Lot Is Riding on Congress
But policy isn't just decided by the President. Congress will have a major role in every pocketbook issue. Every election year, commentators argue that gridlock, when Congress and the President are controlled by opposite parties, is best for investors. That's "predicated on a very cynical view of our political system"—that government is at its best when it does nothing, says Johnson. It's also false, according to his research: From 1949 to 2004, the stock market returned about 6.4% annually in the 33.5 years when neither party simultaneously controlled the White House, the House and the Senate. But in the 22.5 years when one party controlled the Executive branch and both houses of Congress, the market returned 22% a year, Johnson, Scott Beyer, and Gerald Jensen found in a 2006 study.
"Over time, the government has created an economic environment that has been very beneficial for economic growth," Johnson says. The relative performance of the market suggests a united government can actually make changes that make Americans wealthier. "It actually gives you some faith in our system," he says.
What are the priorities on financial issues of the men and women vying to be the next President? Read "The Candidates on the Pocketbook Issues" for more information on some of the positions the current candidates have taken on investing, saving, and other pocketbook issues.