Rent Is No Way to Save for Retirement
Last week, I wrote a post about homeownership in response to a Josh Barro article that suggested it was a lousy way to save. Mathematically, he's correct, I said, but personal finance really isn't about math; it's about discipline. And homeownership, whatever its drawbacks, does force people to save, even if the rate of return on those savings is low.
This week, Barro suggests that perhaps we should offer the benefits of forced savings to renters, too:
But a home mortgage doesn't have to be the only place people get the saving nudge. Right now, the Obama administration is working with employers on a program called myRA, which would give more workers access to retirement accounts through payroll deductions at work. As an inducement to save, myRA participants will get access to an investment modeled on the "G Fund" from the Thrift Savings Plan for federal employees, which pays an above-market return on a safe, bond-like investment.
Why not also allow landlords to participate in myRA, with tenants able to roll a retirement savings contribution into their rent checks? This could make renters a lot like homeowners: They'd make a monthly payment, part of which would go toward housing consumption and part of which would go toward investment. Over time, they would build equity, but it would be in a stable investment instead of a speculative one.
It's an interesting idea, but ultimately, I'm not sure it's practical. Let's consider why:
- Landlords aren't set up to handle this sort of withholding. Your landlord reports the checks you give them as income to the Internal Revenue Service (or so we lightheartedly hope). But they don't report who gave them the check, complete with Social Security number and withheld taxes. The MyRA program, whatever its other benefits or drawbacks, is a pretty low marginal cost for employers, because they already have to employ an army of human resource professionals, and probably an outsourcing service such as Paychex, to ensure that your withholding is right. Maintaining those services is not cheap, but once you've employed them, adding one more withholding category doesn't cost so much. Your landlord, on the other hand, would have to start maintaining all that stuff for his tenants. Small landlords probably couldn't deal with it at all -- who wants to have to hire an outsourcing company just to rent out your basement? Large landlords could handle it, but it would cost money. So your program starts out by raising everyone's rent.
- It's not really forced. The nice thing about a mortgage is that you really don't have any choice about paying it down -- OK, some house-mad fools got themselves into interest-only loans during the heyday of the housing bubble, but in more normal times, I have to pay down the principal because my bank wants to make sure that it gets its money back. "Opt-in" programs like the one Barro is proposing aren't really a good substitute. Many renters could be opting into a 401(k) or an individual retirement account and don't.
- Renters are cash-constrained. As a group, they are younger and poorer than homeowners -- exactly the group that is least likely to take advantage of a voluntary savings program. You might be incurring a lot of extra overhead for nothing.
I tend to think of renting and homeownership as equally valid choices: Renting offers liquidity and mobility; homeownership, stability and savings. Each has drawbacks as well. There's no real need to try to subsidize one over the other, as we do with the mortgage interest tax deduction -- or to try to paste the benefits of one onto the other, as Josh is proposing.
If we want to force renters to save, there are much better ways to handle that -- through an automatic IRS withholding for anyone who doesn't take the mortgage interest deduction or an employer-based program. I think this is problematic, for reasons I'll save for another time. But whether such a program is a good idea or not, there's one thing that seems pretty clear: Landlords are not the right people to administer it.
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