Tax Analysts®Tax Analysts®

My Subscriptions:




Washington, D.C.

Friday, May 12, 2006


Former Director, Congressional Budget Office
Senior Fellow, The Urban Institute

Former Commissioner, IRS
Partner, Skadden Arps

Director, Asset Building Program
New America Foundation

President, Tax Analysts


* * * * *


(9:01 a.m.)

MR. BERGIN: We're getting started a little later this morning. It's a beautiful spring day. We're moving a little more slowly which is a good thing. Good morning. I'm Chris Bergin, the president of Tax Analysts, which is the non-profit publisher of Tax Notes Magazine, Tax Notes Today, State Tax Notes, Tax Notes International and many other print and online tax publications.

Welcome to the second in the series of roundtable discussions we've scheduled for the 2006 season on key issues in tax policy. The topic for today is "Savings in the Tax Code." As many of you know, this is the second year that we've conducted a series of roundtable discussions. If you are new to our discussions, let me first say, "Welcome." Let me also take just a moment to explain our process. I will open things up with some brief remarks to introduce our topic. I will then introduce our distinguished panel of three speakers who're seated around the table.

Each of them will address aspects of our topic for about 10 minutes. After that we will open up the discussion and you're all encouraged to participate whether you're sitting around the round table or not or anywhere else in the room, just wave and I will find you. We're recording this event, and we'll post the transcript to our Web site as we do for all our discussions. Also for media purposes, we're on the record. So when you are recognized, please tell us who you are, and if you don't, please accept my apologies in advance for interrupting you and asking you who you are.

Also, please speak into the microphone. For those of you in the audience, we have handheld microphones that we will quickly get to you. I will moderate the discussion, and we will end at 11:00. One last point. We want to make sure these roundtables are as good as they can be. You can help us. We've left a short survey at each place at the table and on each chair in the audience. We also have extra copies on the table outside if you need one.

If you have a moment after we finish this morning, please fill out the survey. We very much want to know what you thought of this session, and we would welcome any suggestions on how to improve our roundtables. I'm warning you now that I would probably nag you again towards the end of this as we're finishing up this morning about the survey.

As I said, the topic for today is savings in America. We asked the following question, "Is the tax code the answer?" For me, this is a tax topic that raises many questions on human behavior. And as my family can tell you, I pretty much go back and forth on the issue of human behavior.


MR. BERGIN: For example, a couple of weeks ago, I took my family to the Air and Space Museum in Dulles. I left the movie about the two Mars Land Rovers, which apparently are still working by the way, filled with hope and optimism about the human condition. By the time I returned home, I was filled with dread over how many idiots drive automobiles. When I think of human behavior in saving rather than driving, I also think of the fable of the grasshopper and the ant.

We all remember that one. The ant works and saves in the good times while the grasshopper fiddles and dances. When winter comes, the ant is safe, fat, and happy and the grasshopper freezes to death in the dark. In my more cynical moments, usually after driving, I favor the message of the fable. The ant did what it was supposed to and the grasshopper didn't. Both got what they deserved. Applied to the tax code, I guess the lesson is that government doesn't exist to get you to do what you should know to do.

The tax code is for collecting revenue, not to entice people to save or to do anything else for that matter. They don't save, tough. But in more enlightened moments, and I'm grateful that I still have more of those than cynical ones, I'm concerned about the grasshopper. As human beings, we should care about each other and the common good. And like it or not, a tax code must deal with human behaviors of all kinds.

So I believe a tax code, whether income-based or consumption- based, should on a limited basis encourage certain behaviors. And I'm sure that savings is one of those behaviors. I'm also pretty sure that we're not going about it the right way and nothing that's happened this week on Capitol Hill has given me any assurances that I'm wrong. Moreover, I'm worried. I'm worried that one day we as a nation will realize that we have more grasshoppers than we can care for because we didn't do enough as a nation when we could have. And when you think about it, that would pretty much make us all grasshoppers.

But enough of what I think. Let me turn to this most distinguished panel to discuss the issues. I will introduce them in the order in which they will speak. Rudy Penner is a former director of the Congressional Budget Office and is now a senior fellow of the Urban Institute. Fred Goldberg is a former commissioner at the IRS and Treasury assistant secretary for tax policy and now a partner at Skadden Arps. Ray Boshara is the director of the Asset Building Program at the New America Foundation. Thank you panelists all for being here. I very much appreciate it. And Rudy, we will start with you.

MR. PENNER: Okay, well, thank you, Chris. I don't think economists are very good at explaining saving behavior because I think there is a lot that's irrational in saving behavior. And I think it is an area where the so-called behavioral economists have made a big contribution. My old student, Dick Thaler, points out that for ordinary folks much of saving is contractual. It's paying back mortgages, it's buying insurance policies and so forth. And I think one of the most valuable insights that the behavior itself taught us is this whole notion that if you run a 401(k) where the default is that you join, and unless you protest, there you get a lot more participation than if you actually make people be proactive and join.

Well, whether you're rational or not I think one of the things we've learned recently about saving behavior is that there are these vast differences in the tendency to save among people who otherwise look the same with regard to their income profile or the size of their households. And I think that's an important thing to keep in mind that I'll come back to when you talk about the tax code and saving behavior.

Well, why do we care about this topic? Personal saving as conventionally measured, and we don't measure it very well, but it's conventionally measured and is falling dramatically. But on the other hand, it must be admitted that all, as grasshoppers, are having a tremendous time while this is going on. Well, saving increases a nation's wealth by financing physical capital formation and by reducing liabilities to foreigners.

And today's high consumption implies that we're sacrificing relatively less to transfer wealth to future generations. And our ancestors sacrificed for us, in more or less say, and that just ain't quite right. But there are other reasons for the tax code to treat savings leniently, and Chris hinted at some of those. I mean, one is that people with a store of wealth are less likely to need public assistance in retirement, for education or to cover health costs.

It's also thought that if you encourage wage earners to become capitalists, they'll provide more political support for the free market policies that, I'd say, economists love so dearly. I'm not so sure about that argument, but it's often made. And then there is an argument which I do approve of. And that is simply the equity argument that Hobbes made some 400 years ago that it's fair to tax people on what they extract from the economy in the form of their consumption as opposed to what they contribute in the form of their income.

Well, this complex monstrosity, what we call an income tax code, actually blends the consumption and income taxation and are highly confusing and inefficient in manner. There are all these specific tax incentives for saving, for retirement, for health costs, for education. We have these lowered tax rates on capital gains and dividends, while we still do tax corporate capital pretty heavily. Anyone advocating a very targeted tax cut to increase saving has to jump quite a high hurdle.

They first of all have to argue that private saving will increase, obviously, but they have to argue further that it will increase more than enough to offset the revenue loss to the Treasury. Well, one thing that economists have studied and studied is the effectiveness of all these specific incentives. And I think the results are an embarrassment to the economics profession, as you can find studies that show an increase in private saving far more than the loss to the Treasury, a little bit more than the loss to the Treasury, and far less than the loss to the Treasury.

Now, as all we economists know, the problem is that the effect of these things is theoretically ambiguous. The tax cut on the return to retirement saving increases the reward for postponing consumption to retirement. But the trouble is it also gives you an increase in income, so you can also increase your consumption later even if you save a little bit less.

So in theory, the effects of these things can be positive or negative. So also the fact that the way these various accounts all have limits on them that people who save more in theory may not face any marginal incentive at all. But I kind of think that argument is getting more irrelevant now that we have this enormous profusion of these things. So many of them have been made more generous in recent years.

But another argument which the economists really fight about a lot is that you can — in response to these incentives — you can just shift assets from taxable to non-taxable accounts and get a tax cut whether you save more or not. And you can even borrow in a tax- favored manner like with home equity loans to invest in these accounts. Well, there are two types of these favored accounts. The so-called traditional IRA type that allows deductions for deposits and taxes withdrawals and the Roth type that doesn't allow deductions for withdrawals but doesn't tax any of the earnings and the investment.

And the Roth type is greatly favored by the congressional budget process because the Congress budgets with a limited time horizon, usually just five years. So the revenue losses associated with the Roth, which accrue slowly, accrue outside that five-year period, whereas the traditional type, the tax deductions are recorded as a revenue loss immediately. But the revenues you get from withdrawals are likely to be outside the time horizon.

We could have a whole session on congressional scoring of tax measures, and I might suggest that to you, Chris. We have this ideological argument between those who favor dynamic versus static scoring, which is trivial compared to the outrageous distortions we have now in the process, which has just allowed us to finance the tax cut with another tax cut in the congressional scoring process.

I would, I think, favor going more to present value accounting, but that can be gamed too. I can imagine the Congress paying for a tax cut today with a big tax increase in the 20-35 range, something like that. Well, in the article that I just did in Tax Notes, I went on at great length about the possibility of different effects of the Roth approach versus the traditional approach. I don't have time to do that now.

What I'd like to do is turn to a different way of looking at this. And that is drop the discussion of specific provisions targeted on saving, but look more on a more comprehensive tax reform. And the arguments change very radically when you do that. I'm talking about a comprehensive tax reform that's both revenue neutral, and more or less distributionally neutral, something like the President's tax panel just suggested in the consumption tax variant of their two options.

With the revenue neutral reform that moves the system more toward a consumption taxation, one doesn't have to worry about any negative effect on the budget deficit. So that any positive impact on private saving is a net gain. In the first instance too, with the revenue neutral reform, you leave after-tax income the same. So you don't have this theoretical ambiguity. All you have is the reward for postponing consumption since on an average incomes are the same. You could say there are some wiggles there.

But basically I think the effects of the whole thing is much, much more likely to be positive. I think there's another effect that economists don't write about very much. But I'll go back to this notion that you have in our economy these people who just seem to be inveterate savers and these other people who seem to be inveterate consumers. And while we can't explain that very well, it seems to me that a distributionally neutral tax reform will, within each income group, increase the tax burden on those who are inveterate consumers and they'll have to reduce their consumption.

Most of those guys don't have any saving at all. And on the other hand, you transfer income to those who have a very strong tendency to save. And it seems to me they're likely to save quite a bit of their tax cut. So I would suggest this kind of comprehensive reform may be more effective with regard to saving because of that. Well, a comprehensive reform also allows us to escape a confusion which bedevils a debate over particular savings incentives. If the tax burden on all savings is cut while not changing the rest of the tax structure, the rich are favored on average because they save more on average.

And what you often see, therefore, is that those favoring more progressivity may oppose the incentives just on those grounds alone — that they're not progressive enough. On a more sensible debate, it separates arguments about progressivity on the one hand from arguments about what the tax pay should be. Well, it may be hard to design a consumption tax that burdens Bill Gates as much as the current system.

It is certainly possible to design a consumption tax system that's almost distributionally neutral except for the effects on the very few super rich. And one can also construct a reform that uses the saving that we have more efficiently by giving the market more say on how they're allocated and the tax code less say. And just from that, I think you would get a significant increase in productivity that's equivalent to quite a significant increase in saving. So tax reform, comprehensive tax reform, in my view has a heck of a lot going for it. It's too bad it's just so hard politically. You know, it's not there.

MR. BERGIN: Thank you, Rudy. Fred.

MR. GOLDBERG: Thanks, Chris. It's a treat to be here, and the topic is, of course, endless. You could spend days talking about comprehensive tax reform. I would likely suggest it be done differently from Rudy, but I certainly agree with him that is the only option in the long-term. I'm going to talk about a much narrower subject today. And before doing so I want to give an acknowledgment. Most of what I'm covering would be addressed in a Stanford Law Review Article coming out this fall.

It's quite sophisticated, it's very analytical, and it's extraordinary because I was a tag-along. The real authors were Lily Batchelder of NYU and Peter Orszag of Brookings. It's way beyond me. I confess I don't understand it. It's full of formulas, academic literature, pictures, I don't know, some guy named Pigou much of the names I've never heard of. But I really am quite thrilled to be a co- author.


MR. GOLDBERG: Because the conclusion the article reaches, I believe, is exactly correct. And I think it has important real-world implications for tax policy. And that conclusion is that in an income tax system that provides incentives to encourage individual savings — so you're assuming an income, a progressive income tax, and you're assuming that the wise and the mighty have answered Rudy's question. Yes, it is a good thing to provide savings incentives — that those incentives should be structured as a universal refundable flat rate credit rather than as deductions, many of which are phased out at various income levels.

Before trying to explain why this makes sense, I'd like to make a couple of preliminary observations and offer a few key data facts. First, we're talking about a progressive income tax and we're talking about a judgment that has been made. To do this, we accept that judgment as a starting point. Second, we're not talking about some kind of stealth move to a consumption tax. We're starting from the assumption this is an income tax.

I am, and have been a strong proponent of an add-on VAT; I believe it is both a virtue and a necessity. But that is a policy that needed to be debated, fairly discussed, and if the will is there it should be done, but it's not this kind of stealth movement to a hybrid system. We're talking about an income tax. Now, for some facts and these are stunners.

A $1 deduction is worth 40 cents to taxpayers facing a 40 percent marginal rate. A $1 deduction is worth 20 cents to taxpayers facing a 20 percent marginal rate. And a $1 deduction is worth nothing to taxpayers with no income tax liability. Now, economists will argue that that's not right, but to my pea brain that's the math and that's the conclusion I reach. Second fact, during any given year, almost 40 percent of all potential taxpayers, families and individuals, have no income tax liability.

The second — third fact, over their lifetimes approximately 80 to 90 percent of all potential taxpayers do have a cumulative income tax liability. So you have this world where during any one year 40 percent of us don't have tax liability, but you also have this world where over life times, taking everything into account, 80 to 90 percent of us will have a positive tax liability. Now, with those facts in mind, let's turn to the question of savings incentives in the context of an income tax system.

Now, as Rudy said, the code is replete with savings incentives. They are grotesque, they are narrow, they are complicated, but they are there in spades. And to my way of thinking, they focus on the four virtues. The four virtues of home ownership, education, retirement, and healthcare. Now, when you think about it kind of like a normal person, it's not at all — how do you quarrel with this. These are savings programs; these are investments — human capital, a home, retirements, savings for retirements, savings for long-term healthcare.

And it is certainly not surprising that Congress and administrations of all stripes want to encourage these activities because they benefit individuals, they benefit families, they benefit communities, and they benefit the society-at-large. And as it turns out, the tax system is a reasonably and a readily available delivery system to encourage those kinds of activities. So at one level you can quarrel with how it's done, in the sense it's complicated and hard and, you know, you're misusing the tax system, but these are four virtues.

And in a democracy, in the society we live in, you can't quarrel with the virtues. But the problem is that with the acceptable — with the exception of the non-refundable savers credit — these incentives are generally structured as deductions sometimes with — or exclusions from income with — often with phase-outs. And the question is, is this a good way to use an income tax system to encourage a kind of savings-based behavior given the constraints we're living under?

In turns out that for the following four reasons it's terrible policy. A far better system would be a universal flat rate refundable credit. First, if the goal is to encourage this behavior, there's no reason that both the public and private benefits from these types of activities that we're trying to encourage should depend on the current year income of the individuals and families engaging in those activities. Deductions provide no incentives to the 40 percent of all potential taxpayers who have no tax liability in any given year.

The system says to a family subject to tax at 20 percent, "It's great for you, and it's great for the country if you achieve the American dream and own your own home. And to encourage you to own your own home, tell you what, we will effectively pay 20 percent of your mortgage interest." Now, we say to somebody making a lot of money, "You too should join the American dream. And to provide you with the appropriate incentives to own your own home, we'll pay 40 percent of your mortgage interest cost."

Now, you know, so you can react how you want to. I believe the article offers detailed proof that is an economic matter of an economic theory. This is an inefficient way of structuring incentives, and you're suboptimal under some guy's optimality backs, but I have a more personal take on the issue.


MR. GOLDBERG: I mean, I think that's right. I think it's pretty obvious that that's right, but mine is much more personal. I got five kids. Four of them are grown. They're actually — they're adults, they're working. Two of them are teachers and two of them work for non-profits. Well, I'm the 40-percent guy and my kids are the 20 percent guys. You know, as they say, "Great for you, Daddy." I use other words, but my word is "stings" for them. The problem is it stings for the country at large.

And we're saying the same thing with MSAs, for example. Do we really believe that we should provide more incentives to high-income workers because they're better shoppers for healthcare as opposed to someone who can't take full advantage? Does it really make sense given what we're trying to do to say that we want to provide no savings incentives to low-income workers and provide big incentives to high-income folks? I mean it phases out, so you're dealing with a different group here because low-income workers' savings are somehow less worthy?

It doesn't make sense as a policy matter. The second reason it doesn't make sense as a policy matter is that in an income tax system we have no choice but to measure income annually and collect taxes annually. We can't do it sometime — "Well before you go meet the maker we'll figure out how well you did and figure out what our take is." We've got to do it every year. Well, think about, you know, real life, the vicissitudes of real life and the joys of real life.

My income, my family's income goes down because I get laid-off or a family member gets sick or I take time off because we have a kid or I take time off to go get an education or I have a terrific year and get a big bonus. And incomes fluctuate in a system where 40 percent of the people are moving in and out of tax liability at the low end and in a situation where many, many, many more taxpayers are moving among marginal rates or are moving above and below phase-out levels.

And then compare those families and individuals with the family or individual who has relatively stable income over a period of years. And if you look at those families over a 5-year, 10-year, 20- year period, it turns out that those families who have volatile incomes for all the reasons, in the real world, real people do have volatile incomes, end up in a very different place.

And one way to think about it, if you're using deductions, one way to think about that — a refundable flat rate credit system — is that it's surrogate for income averaging, and second, it's countercyclical at the family level. It gets the money to the family when they need it. I've got a mortgage and I get laid-off, that's when I need the credit to help pay the bank.

In essence, if you think about the individual, you're making a trade. You're saying, "Well, I'm going to spread my credit. So in the fat years when I'm making lot of money, maybe this all will have a neutral, which I'm going to get to soon. I'm getting maybe less of a credit than I would otherwise get in exchange — by way of a deduction. In exchange, I'm getting more of a credit when I need it.

The third point, and again this is where I abandoned the article entirely. Peter and the Brookings folks did a study of, if you think about, refundable credits. It turns out that they — it's not huge but it does have a non-trivial countercyclical effect at a macro level. Money is going out when it should be going out at a — you know, like [off microphone] spent the money, right, when the economy is not doing so good. Well, if you think about refundable credits, they have that same kind of effect.

A fourth reason, refundable credits have the virtue of budgeting, a truth in budgeting. And so this year you lose the revenue this year for the incentive you are providing this year. It's not what — it's the opposite of what Rudy was describing of, "you shove it into Neverland" for budgetary purposes. It's also interesting to think about it in a different perspective from a budgeting standpoint.

You can do all of this on a revenue-neutral basis. You can say, "Look at all these things we are doing," this hotchpotch of provisions to promote savings or deductions and phased-out deductions and exclusions and all these other stuff we're trying to do, and say, "We can do this on a revenue-neutral basis." Nothing new. Just to change the system on a revenue-neutral basis.

Now, in thinking about revenue neutrality, it's important to keep in mind we're talking about a universal refundable flat rate credit. Part of the trade you're going to have to make there is that the rate — to get to revenue neutrality — the rate of the credit is going to depend in part on how you cap the benefits. For example, if you have $10,000 permitted contributions to IRS, your credit rate is going to be different than if you cap that contribution at $5000 or $3000.

The — it's — just as a footnote, I think some of you, at least, you're aware of the President's commission on tax reform populated by people that this administration chose to appoint played with a variation of this concept in connection with the whole mortgage interest deduction. So I assume I'm not creating complete political suicide here.


MR. GOLDBERG: But the — there's a political context to all of this. And I believe that the — both parties have made a pact with the devil. And the deal is, on these kinds of incentives, the Democrats will die before giving a benefit to the rich, which in some cases people making more than $60,000 a year; and the Republicans will die before they will make it refundable.

And that is an awful trade. Just a reprehensible trade in my view, as compared to a universal system. There's an issue of administrative stability. I think that is utterly bogus. There is no evidence, that I am aware of, that credits generate a higher degree of non-compliance in other forms of tax incentives.

Nor is there evidence that a refundability aspect to a credit generates higher forms of non-compliance as catering to it. If I'm getting an income tax credit and I want to rip the government — you know, I can reduce my positive tax liability, or I can get a refund, still it's all money to me.

Second, universality eliminates the complexity that drives much of the noncompliance. Everybody gets it — you got it, he got it. That, you know, you solve the problem by getting rid of the rules, create the noncompliance.

Third, by their nature, saved assets are readily subject to information reporting. Somebody else is involved in the transaction whether it's education or whether it's a financial institution holding the account. So information reporting is readily available to deal with compliance issues. And, in addition, by their nature, saved assets are there if enforcement becomes an issue down the road.

So at least we — I discount the administrability argument entirely. So that is at least our take on the issue. It assumes it is good to do these things. It doesn't get into the question of whether you should use a tax code this way. But if you are going to do it, universal refundable higher rate credits is the way to go.

MR. BERGIN: Thank you, Fred. Ray?

MR. BOSHARA: Yes. Good morning. Thank you to Chris, Larry, Wendy, and others. These are very tough acts to follow. I will do my best. I work at the New America Foundation. I direct a program that spends its time thinking about building savings and assets for the bottom-half of the population that doesn't really save in on much right now.

I just met Rudy today, but I've been working with Fred for 10 years, and have learned a lot from him. So my talk is a little different. I will address these issues from the perspective of low- income savers, talk about — briefly about the limits of the tax code, and, I think, some lessons we've learned about what in fact does encourage savings by folks on the low end.

So the question that was posed is, "Is the tax code the answer?" Yes, I think it is, but only part of the answer, and probably not the main part of the answer. I think few would dispute, in this room, that we offer more incentives to higher-income folks who have the least need to save while offering the least incentives to those who have the most need to save.

I was going to quote some numbers. I think the numbers are pretty clear. And, you know, there are — you know, so that's not disputed. There is dispute of course, whether or not the distribution of those benefits is actually good for the economy. Conceptionally I think that it's good to reduce taxes on savings.

The guiding principle should be tax more of what you want less of and don't tax what you want more of. Very simply, it should — that should be our guiding principle. So we should be taxing things like pollution and carbon emissions, consumption, and not taxing work, not taxing savings and investment.

My colleague, Maya MacGuineas, has advocated for something called a "progressive consumption tax," which embodies a lot of those principles. So I'm actually in favor of using — reducing taxes and otherwise using public subsidies to encourage savings.

But those subsidies must be directed at those who, from a social policy perspective, have the greatest need to save and build wealth and those for whom, from a national economic perspective, would generate new savings and thus contribute the most to national savings.

Interestingly, when you direct savings subsidies to the bottom-half of the population, you're really — you get both of those. You get both of those effects. And something that Martin Sullivan in his article calls "policy nirvana." I'm sure that was a good term.

So I think — what I really want to talk about is what in — you know, if the tax code has limits in reaching low-income people as Fred has pointed out, and it's not clear that we're generating a lot of new savings at the high end, what is it in fact that does promote savings, especially new savings?

I liked Rudy Penner's comment at the beginning about the valuable insights that economists have provided into human behavior, but they're not really good at explaining savings. There is a lot of irrationality in that. I think that's correct, but thanks to the work of behavioral economists, there are a few things that are explainable.

And I — you know, these are really the power of inertia and people doing things for you. It's in very basic terms. Many of you know that there are various theories of savings out there, neoclassical views, behavioral, psychological, and sociological. The neoclassical view, of course, is dominant.

You know, quite simply, those who save prefer future consumption over current, and those who do not save prefer current consumption over future. Now, each of these theories has an institutional feature or component in it that they all talk about the role of institutions in facilitating or encouraging savings. And I think that's important.

What I'd like to do is talk about this institutional view, because it's very important. I don't want to posit the institutional view of savings as something new or a separate theory, but rather to extract the institutional characteristics of each of the savings theories, elevate them, give them some coherence, and then unpack them and sort of identify what are the institutional determinants of savings.

Some of you know that this way of thinking is very much informed by the work of Michael Sherraden and Sandy Beverly, who've been pioneering this institutional view of savings for some time now. So there's actually six things, six institutional determinants of savings.

One is access. Do you have access to, like, a 401(k) plan? Second is do you have information like financial education? Incentives, are they matching deposits or tax breaks? Fourth, is there facilitation? Did somebody do it for you, like, through an automatic payroll deduction? Fifth is expectation. Is there a match cap of — you know, we match the first $500 of your savings or a target.

And then finally what we call "limits" or the "contribution limits," like IRA contribution limits. You know, each of these factors determines who and who does not save. Interestingly it's the presence of these external features that better explain savings and not income and not preferences.

Those who have access to these features save, and those who do not have access do not. So what evidence do we have in support of this view? And I should point out that the evidence is emerging. We don't have a lot of great evidence to set a lot of models out there right now. But let me say some of the evidence that we have — many of you may be familiar with IDAs — Individual Development Accounts — which are match savings accounts for low-income people.

There's probably 30,000 of them around the country right now. About 3,000 of them have been put into controlled experiments here in the U.S. There've been experiments in Canada and around the world. I published a piece through Brookings on IDA summarizing all the evidence, if you want to read it. But essentially one of the more fascinating insights is that income did not predict savings.

The poorest of the poor — people at 50 percent of the poverty line or below — actually saved a greater percentage of their income than those who are relatively better off poor — people closer to 200 percent of the poverty line. In absolute terms, they saved about the same — $19 a month, anywhere from $19 to $40 a month depending on what you account.

But as a proportion of their income, the very poor saved a greater percentage of their income than the better-off poor. And H&R Block's Express IRA experiment in St. Louis — it was very clear. The headline was that incentives matter, although one doesn't really know if it was the match or the intervention of the tax pro that really explained the increase in savings in the Express IRAs.

But what is for sure is that the savings opportunity was well structured. It was well facilitated. It was institutionalized through the tax offices of H&R Block, and it contained many of the features that I mentioned. A third piece of evidence, if you look at the take- up rate on Roths, it's anywhere between 5 and 15 percent, but if you look at the take-up on 401(k)s, it's closer to 75 percent.

Roths are not part of structured savings plans, but of course 401(k)s are. And I think that explains a big part of the difference. And of course, we've talked about the effects of auto-enrollment of 401(k)s. You know, when the default is nonparticipation, it's only 13 percent of those making less than $20,000 a year, but if the default is participation, it's 80 percent.

So it's — employers who do more for their employees have much better rates of savings in participation. So the summary of all this is that these — I think you can summarize all these institutional arrangements in one word, a "savings plan — plans." If we want to increase savings, we don't just need tax-benefited products, we need to have tax-benefited plans.

We need to take everything that is working in 401(k)s, the thrift savings plan, and 529 plans, and replicate those plan features for the entire population. So — but what would be a policy agenda to reflect that? Clearly, there's a pretty ambitious policy agenda that New America and CFED and many others in this room, Gene Steuerle, have articulated.

We've summarized it in this report called the "Assets Agenda," which we publish once a year — 25 pages of policy ideas. And there are — clearly we need to do things like reforming asset limits which are taxes on savings, we need to connect tax refunds to assets, we need to promote access to mainstream financial services, we need to do match savings through refundable tax credits.

I mean I think there's a really good question about the best way to deliver a public subsidy for encouraging savings. You can do refundable tax credits, you can pass the credits through employers or financial institutions, but I think the ultimate challenge is to get every American into some sort of a savings plan — to get all the defaults right — so that it's easy and automatic for all Americans to save.

I think the recent Brookings-Heritage proposal for auto IRAs very much embodies that view. But I think the ultimate default, the major default, the best savings plan that we can think of would be kids' accounts. And Fred, of course, is a pioneer on this idea that the day you are born you are defaulted into a savings plan. Without thinking about it you have a savings account established for you at birth.

It's lifelong, and it's used for buying a home, going to college, and for retirement. You basically get the plumbing in place, the infrastructure in place. It makes it possible for all people to save. And New America and others have worked on a bill supported by Senators Santorum and DeMint and Schumer and Corzine to, in fact, establish an account for all Americans.

I think starting savings at birth is a good idea. Diana Farrell of McKinsey Global Institute wrote a report about global wealth shortfall coming down the road and what are we going to do about that. And her two main recommendations are to increase the rate of return in the savings that we have, but also to start the savings habit early.

So let me just conclude with two ideas. I think we need to redirect or extend the subsidies that we now have for savings to the bottom half of the population and we need to have tax-benefited, inclusive savings products and savings plans. Thank you.

MR. BERGIN: Thanks, Ray. I'm not sure I have the answer to the question yet, although I'm still not convinced that I'm wrong in thinking the current system's a mess. And not a very fair mess at that. We're going to open it up to questions now, comments. Please, when I call on you — and I'll try to be very fair and look around and swivel a lot, make sure I get people.

State your name. Even though the first guy I'm going to call I know his name very well, I'm going to ask him to state his name as well.

MR. ALEXANDER: My name is Don Alexander. And I — a question — why are we here? Is there a problem? Normally I don't put much faith in the Wall Street Journal, but if the article is in Section D and the editorial page is in Section A, the article is probably far enough from the editorial page to be truthful.


MR. ALEXANDER: Given that assumption — it's only an assumption on my part because I may be totally wrong — Wednesday's Wall Street Journal said this, "Retirement savings rose to $14.3 trillion in the United States during 2005." "$14.3 trillion" sounds like a lot of savings. Now, maybe the savings are owned by those who are lucky enough to be the beneficiaries of the tax bill that's just been paid, which will help them save even more on their hard-earned dividends, but that is a lot of money.


MR. ALEXANDER: So do we have this immense problem that we're supposed to have, of the savings which seem to be rather large in the wrong hands, and maybe we should turn more of the grasshoppers into ants or make the ants substitute as the grasshoppers.

And the next question is, should we do this through the tax system? As one who fell unsuccessfully in the idea of having an earned income credit in the tax system — Milton Friedman wiped me off the map — here's something else that we're going to put in the tax system and the tax system is already loaded, as has been pointed out, with various saving incentives.

It would have been even worse had the administration's LSA proposal, a perfectly ridiculous proposal, been enacted, but I think that's never been dropped. Do we want to have another refundable credit? Now, I admire Fred Goldberg's exposition of his refundable credit.

But I'm not as optimistic, Fred, as you are, about the administrability of that credit given the fact that we do have a refundable credit called the earned income tax credit in the code, and given the fact that we have a large, I would say, compliance problem with that earned income credit. Above 30 percent, right, Fred?

MR. GOLDBERG: That's what they say, Don, about half the noncompliance rate among the self-employed, but, yeah, you're right.

MR. ALEXANDER: Yeah. About half, perhaps, and of course, we're coping with that I guess, in the new tax bill with part of it. But if we do have — and I'm going to ask Jim White whether he thinks this is true. A noncompliance rate generally puts the Internal Revenue Code up somewhere around 15 percent, perhaps the size of 20 if you've got illegal income.

The over 30 percent rate in the earned income credit would appear to be somewhat higher. What do you think, Jim? Is GAO prepared to say anything on --

MR. WHITE: I'll go out on a limb and say that percent is more than 15 percent. You know, obviously it depends — it --


SPEAKER: You'll have to get that cleared with headquarters.

MR. WHITE: Not that. It obviously depends on the type of taxpayer. The noncompliance rate is very high for self — relatively quite high for self-employed, independent contractors, and so on. For wage earners subject to withholding, the compliance rate is very, very high.

MR. ALEXANDER: Absolutely. But do we want to introduce this into the Internal Revenue Code? My position I guess as a narrow-minded tax collector, as I was, is that if you have a credit rather than a deduction, the credit should be refundable. If you have a refundable credit, that does not belong in the tax system — it belongs somewhere else. HHS should be administrator here rather than IRS.

One final little point. Automatic enrollment. Automatic enrollment is in the pension bill, you know, the concept — implementing the concepts in the pension bill. The pension bill is the trailer bill, as we all know. The pension bill is waiting on all those good things like the research credit and the extenders, other extenders to move. It's a great idea. People won't do things.

So if your default is in the best interests of the grasshopper, that's great. But the problem there is that gee — the grasshopper. And they have trouble, as has been pointed out earlier, surviving it all. And taking money from those who can least afford it and say, "Hey, you have to save, or you can't consume." That's two things. Number one, it isn't effective as to those who simply can't afford it. And number two, if as supply siders say, we have to reward those who turn out to be at the top one-tenth or one percent and discourage those who do buy things. If nobody buys anything, who can sell something?

MR. BERGIN: Anybody got a comment?

MR. LOBEL: Yeah, why don't you ask the panelists who have — Marty Lobel — as to whether they favor using the tax code for this or some other program? I mean, it seems to me that what I just heard from Fred and Rudy is, the tax system is broken. Maybe we have to go back to '86 or something like that that will simplify the system, and put in some programs that would do what they think ought to be done separately. I think it'll be interesting to hear what the panel said.

MR. BERGIN: Is the answer to the question, "No, it's not the tax system?"

MR. PENNER: Well, it's not the tax system we have, that is the important point. Well, like Fred, and I suppose that Ray would support this as well. Really, the only way out of this is some sort of comprehensive reform and it really is tragic that the President's tax panel, which I think, given all the constraints they faced, really did a superb job. It's too bad their recommendations were just dismissed out of hand as being politically implausible, without even the press really giving them a careful going over for just — I mean, just one example on the tax credit for mortgages, I think, actually more people would have gotten the mortgage deduction under their proposal than get it now.

I saw that in no newspaper article whatsoever. You know what --


MR. PENNER: Go ahead, Fred.

MR. GOLDBERG: Rudy's absolutely right. But I guess, my answer, and I say this with great trepidation, is I do believe that the infrastructure created by the tax system should be aggressively used for these kinds of purposes. Now, that's different from saying the IRS should do it. But I think one of the greatest national resources we have is the financial infrastructure created by the system we have. And I think that it is entirely appropriate to exploit that infrastructure for these social goals. Now, whether you should do it through deductions or refundable credits or whether you should use that infrastructure for purposes that Ray is describing, I think it is folly to walk away from that structure. The answer — a pretty answer to Don's question — is about 25 to 30 percent of all Americans are unbanked. There is greater asset inequality in this country today than at any time since the great depression.

If you look at Katrina and the Federal Government wants to get $2,000 to each of the victims of Katrina, and I believe 80 percent of them were unbanked. If you look at all of the victims of Katrina who literally lost their money because they literally had their cash under the mattresses that got washed away. And the — if you look to a policy were the government and — we have collectively decided we're moving away from defined benefit plans.

We are pushing individuals into a mode where they are accountable for the management of their own investments. And the only structure we have that connects to everybody is the Social security number and the party — the person who runs the Social Security system in terms of getting the money into the system's Internal Revenue Service. So I think it is a most appropriate platform to use. Now, that is a separate question from, "Should the IRS be enforcing all this?" I mean, you know, when you pay your credit card, it's not really the company that you brought from, but somebody else is out there doing it.

MR. BERGIN: All right.

MR. GOLDBERG: Somebody else has built a platform and I would use the IRS platform.

MR. BERGIN: Let me go to Ray first.

MR. BOSHARA: Just a comment. I mean, I think fundamental tax reform is necessary. But I also want to make the point that there is a lot that we can do right now absent fundamental tax reform to promote savings. Whether it's — here comes a comment.

MR. LOBEL: I just — that I was wrong.


MR. BOSHARA: I mean, I think the --

MR. LOBEL: Thanks Don.


MR. BOSHARA: Yeah, I just — I don't want to think that we have to wait for fundamental tax reform in order to get savings going in this country to have the political alignment that is necessary to make these traits possible. I think there is a lot you can do with 529 savings plans, there is a wonderful infrastructure that could be tweaked to make it possible for more Americans to save. You can take the thrift savings plan structure and extend it to more Americans. You can do more on 401(k)s. Split refunds is on deck, some version of KIDS Accounts — you know, setting up savings plans will generate billions of dollars of savings in this country without necessarily waiting for tax reform to happen. So I don't think we should wait for that.

MR. GLECKMAN: Howard Gleckman, Business Week. I actually — I just really have a question for Fred. Does your proposal contemplate replacing the whole structure of tax-advantaged savings plans with this, so you get rid of everything?

MR. GOLDBERG: I get rid — all the stuff is garbage, Howard, and I will get rid of all of it, I'll dump it down. I personally think, the LSA/RSA structure, as a replacement for everything, is a net-net trade-up. And I think it's pretty easy to structure a system of flat rate refundable credits. And I agree with Don. I mean, I think there really is a question as to — a serious question, whether you want to try to do any of this through the tax code.

But if you're going to — and I believe that in a democracy, the four virtues are the four virtues, being home ownership, education, health care and retirement savings are things that — we care about it too much, and we should. But if you're going to do it, get rid of all of this stuff and replace it with just a very simple, refundable credit flat rate, I think, is a major trade-up in terms of simplification. So that's what I do.

MR. GLECKMAN: So then I've got a question for Ray, which is your — you've got 20 pages of ways to tweak the current system. Why is it better to tweak what we have, as opposed to replacing it with one idea.

MR. BOSHARA: Well, some of the ideas are much more than tweaks. They are very fundamental. Well, who knows when we're going to have tax reform? As much as I would like to have it, I think if we don't — and given the fiscal constraints — if we don't take what's on the books now and work with it, extend the savers credit, set up KIDS Accounts out of 401(k)s, split refunds, there are a lot of things that we can do now that are pretty simple that would generate new savings. So, you know, we need to keep — we need to keep doing what we can with the system we have, with the hope that a larger overhaul will be better for the long term.

MR. GLECKMAN: One more question — bear with me — which is many people argue that one reason why people don't take advantage of what we have, is because they are so confused by the many choices. So if that's true, why wouldn't you want to at least consolidate some of what you have?

MR. BOSHARA: Oh, sure. Yeah, I think — look, I think fewer accounts over the long term is better. I'd like — I actually am in favor of some progressively funded LSA, where we can collapse these things. Savings needs to be in addition for the four virtues — we need to have savings for fixing the car and fixing the washing machine, you know, some sort of a flexible savings account, in addition to long-term wealth accumulation accounts make a lot of sense. So I think our KIDS Accounts, for example, or an LSA can be the account which a lot of these collapse over time, but given the unbanked problem, you know, whatever the number is — 20 to 40 percent — we've got to get the infrastructure in place so that everybody has an account. And I think they are all going to merge at some point into one unified account.

But if we don't tweak what's on the books right now at matching Roths, matching 529s, tweaks — you know, a tweak to a Roth to make a kids Roth. I mean, there are things that we can do right now that really will — you don't have to create new products, is my point. You can work with what's on the books, with the view that they should and probably will collapse into one system over time.

MR. BERGIN: But would you agree, Ray, that one of the biggest problems is you have to educate people on how to save --

MR. BOSHARA: Sure, uh-huh.

MR. BERGIN: — and get them into the system. One of the reasons that having — forcing people into a structured savings system and making them — forcing them to opt out which sounds unfair, I think part of that comes form desperation. In our own situation, we tried to provide the best retirement savings plan we can and in lieu of, you know, sort of forcing people into it, I go stand in front of them and say, "Don't be like me, don't be an idiot, when I was young I didn't save." I don't really enjoy doing that, but it's out of desperation.

How do you educate people? It seems to me Fred's got a good idea. If you get them into the system with a refundable credit, that's one way of forcing them. Is there another way to educate people on how to learn how to save?

MR. BOSHARA: Well, I think the financial education is important. But I also think that the account should come before the education. You have to give — you have to give people a reason to want to educate themselves to save. And so I think we have to think about what do you do to increase the demand for financial education. We don't have a supply problem, we have a demand problem and we have experiments and IDAs, and others that suggest leading with the account, you know, then gets you the financial education that you want.

And I think the long-term answer is tying financial education to a system of KIDS Accounts. You got to create a culture of savings and kids need to grow up with the system. So, you know, it's an important part, but the account has to come first.

MR. PENNER: But educating people means educating them as to all the penalties they'll face if they do save. I mean, you have all the asset tests, you have the financial aid requirements in universities that by themselves impose a big tax on saving, we just reckon with — we've just erected all these barriers. And it's — while I was arguing before there is much that's irrational savings behavior, that people react to all these barriers rationally and why not be a grasshopper.

MR. GOLDBERG: Can I answer that? I think Rudy is — the best single thing I could believe, could be done for savings is to systematically go through all of the barriers and all the implicit taxes imposed by all these "Holier than thou" universities, by the federal government, by state governments. If you just simply — there was another experiment, Ray didn't mention it, on setting up savings accounts, where 40 percent of those who tried to open up accounts were precluded from doing so because they were not previously bagged. And regulations promulgated by our federal government made it impossible to open those accounts. And I think that if someone were to take the time to go through those kinds of barriers, that is something you could do. It's in the hands largely of the regulators — make a huge difference, just a huge difference.


MR. WHITE: We've been talking about personal savings here by implication, which is important to do. It's one part of national savings, but it is only one part of national savings. And I don't want to necessarily head off that discussion, but I do want to recognize that there are other components of national savings — business savings and government savings, and perhaps the surest way to increase national savings is to stop government dissavings and obviously that's another role that the tax code could play.

So I don't want to necessarily end the discussion on personal savings, but we need to recognize that there are other types of savings, other parts of national savings.

MR. BERGIN: The young lady here has been waiting patiently.

MS. MCKENNEY: Hi, I am Robin McKenney. I run a non-profit in Baltimore and we have IDAs. We do free tax preparation, for-profit tax preparation, financial quotient, and the whole range of things. And one thing that we've seen more and more over the last couple of years is people cashing up their retirement at an epic rate, just to me. And so the protection side for me, I think that there is — and you know, with IDAs people like — yes, people save, but just like Ray said, it's flexible as the development isn't linear.

People come in and out of savings. And my biggest concern right now is I had a client this year, came in, became disabled and her employer self-managed their pension. So they're really putting the pressure on her to cash out her retirement. Nobody talked to her about rolling over. She was disabled, her disability hadn't kicked in yet, she cashed out $60,000, lost 30 percent of it to taxes, which made her social security taxable, and then she wasn't eligible for any of the free pro-bono tax help through our low-income tax clinic and other things because she was over-income. So here she is, she has been a good saver. She has worked hard her whole life. She lost 30 percent of it for taxes. So how do we protect people like her?

MR. BERGIN: That's a great system. Gene, got an answer?

MR. STEUERLE: No hardly, I — although --

MR. BERGIN: I missed your name though.

MR. STEUERLE: I'm sorry. It's Gene Steuerle from the Urban Institute. Although I was thinking that — you know, most people think the IRS is somewhat boring. And I was thinking we could have a nice National Enquirer article with two warring IRS commissioners or former IRS commissioners. It might liven up the image of the IRS, if there was nothing else. I was also thinking about your analogy with --

SPEAKER: That has been [off microphone] has already done enough to me.

MR. STEUERLE: Oh, okay. Well, I've been attacked on the Wall Street Journal editorial page 2. So I can't — we all have our notes. I was thinking about your analogy with the grasshopper and the ant and one aspect that I think needs more attention — Rudy mentioned it briefly — is the whole question of how to treat borrowing. And, you know, the problem, I think, most of us have in this environment is we all sort of really end up wanting to play the political game the politicians do, is we want to identify winners. So, you know, we'll move towards a consumption tax and help people who are saving and we'll move towards helping low-income people.

And, in fact, there are a lot of things in the system that just don't work. I mean, you know, if we are going to be revenue-neutral, for instance, somebody is going to pay for any of these changes, we have to do. And with the grasshopper and the ant, I think that the real story today is that the ant saves and gets almost no return on its saving. The grasshopper borrows the saving, doesn't save at all, leverages up the money, gets bankruptcy and corporate tax protection, makes a mess, and then gets capital gains treatment on it's earnings.

It walks away with all the tax-breaks not having done the saving at all, and the ant who is down there saving this little bit and not getting a pretty lousy rate of return is the one that doesn't get much return at all. And so — anyway, the first thing about this system is it's sort of — it's really sort of upside down. If we really want to favor saving — maybe this goes a little bit to where Fred and Ray are — why don't we start with worrying about what we do for people at the bottom who aren't saving much. And that's both dealing with all the barriers people have talked about, but it's also even we are given tax breaks. Why do we always want to start with the tax breaks that go to the wealthiest?

That could make a supply side argument for the latter, but that's about the only way that I could probably get there. But one of the comments, and this has to do with — and I don't even know how to put this in, because everybody who had commented — I had some nuance I wanted to make. I think when you're dealing with asset development for people, are you dealing with capital income issues in the tax code — and this is true, by the way, even if you have a consumption tax. You are into some of the most complex areas and you just sort of can't avoid the complexity, because you're automatically talking about things that are happening over how, you don't still save — you are not done at that point of time. You have to figure out what you do with saving today, and the consumption tomorrow. It's — they are lifetime types of issues.

So if you start dealing with pension policy, you have to drag in what you want to do with Social Security at the same time. And I worry a little that sometimes we think that there are going to be simple answers.

An example being, I think the commission actually was — took off from the paper I did on the housing subsidy in terms of some of the choices they made. It turns out the tax code automatically gives us a tax break that's related to your tax bracket. And that's because you get the exclusion of the gross rental value of your home — those of us who know the technical aspects.

And you sort of can't get around that. You can create a credit all you want, but you still have a tax code that's got a deduction exclusion aspect to it that you can't get around. You can't sort of force it into — purely into a credit mode and so you have to decide what you're going to do about the equity owner versus the mortgage lender, and if you give a credit for mortgage, it is — I'm just going through one example, you give a credit for mortgages, you're actually encouraging people to hang on to their mortgages, I mean. So there are a lot of very difficult issues here. And I think sometimes when we try to come up with these simple statements, "This should have been in the IRS," or "Shouldn't it" or "Should we have a consumption tax or not," it just — it doesn't sufficiently deal with the intricacy of some of the issues we have to deal with.

I think you have to address housing policy, and what you want out of it, and that's complicated. You have to address pension policy and what you want out of it, and that's complicated. You have to address whether you want asset test and welfare systems, and I don't like the way they are operating now.

But it is a legitimate issue and, you know, as to whether you want to give welfare to people who have zero income, because they don't realize it, but huge amounts of assets. So you have to deal with these issues. And I think sometimes we've tried too simply to wave our hand — wave away some of these issues.

MR. WILSON: I'm Bernie Wilson from H&R Block. I certainly don't have the answers and H&R Block doesn't necessarily have the answers. But we do have some practical experience. You know, from our perspective the two are not mutually exclusive, you know, evolution as well as fundamental reform. And, you know, institutions as well as people emanate from their strength, they end up evolving not, you know, revolutionizing themselves.

And from our experience and learning from Richard Taylor and many, many others, without some level of experience, low-income savers will without understanding it, be grasshoppers. And that's been their experience, it's been their parent's experience, it is their friend's, it's their entire neighborhood — nobody is saving.

So they have no frame of reference. And so when someone like that comes to H&R Block, our experience has been the framing is critical. If we help them understand the various opportunities to save, they may not save immediately. But over time, they will save and they save increasingly so once they begin to experience, you know, that framing. I would also say that the notion of KIDS Accounts is an aspect of revolution as well as, you know, allowing the system to evolve.

We spent some time — I know Ray has, and H&R Block has with David White, who is fundamental in creating the Children's Trust Fund in the U.K., essentially a KIDS Account, $500 at birth, and a significant amount more for low-income families. And what has happened is clearly, you know, Ray's point about the account, you know, it creates the demand for financial literacy, I think, is actually bearing out in early studies.

Certainly the kids have an account, you know, that they're going to receive when they turn 18, but what's happening is the parents — based on surveys — the parents are learning that they have to learn more about financial issues in order to understand this account that they have, and increasingly so they are starting to save on their own for their own retirement having become aware that these other, you know, that this account exists.

So it's really becoming a family account, not a KIDS Account, and I think, it really goes to the way in which adults learn. So much money is spent on financial literacy that, you know, unfortunately for many of us in the room ends up getting wasted. It could be essentially what Ray is talking about is revolutionizing financial literacy instead of spending a whole bunch of money on programs that just don't get taken up, because, you know, I can listen to an infomercial about, you know, losing weight or speaking — you know, learning how to speak a foreign language. I walk away and forget about it. But if there's something that is tangible, and I can hold on to, it tends to force me to learn about it.

And I think that is the subtle learning — not so subtle learning from David White's experience in the U.K. that it is — it's really causing the family unit to become more financially aware, financially literate, and is actually changing behavior.

MR. GOLDBERG: David is a remarkable — those of you who are interested in this issue, he'll talk to anybody. He has stories that are just hysterical, I mean, you drop down laughing, and he is a very approachable guy, and I think, gets it more than most. And I'm sure you can get his contact information from Ray. He is really a resource on this issue. He's terrific.

MR. BERGIN: David.

MR. BRUNORI: David Brunori, I'm with Tax Analysts. I would like to ask our panelists what the real effect of the tax code is on savings, because in my personal experience with my family, I have an 80-year-old uncle, who as Rudy mentioned before there are inherent savers, and inherent spenders.

I have an 80-year-old uncle who still has his first Holy Communion money and, you know, will never spend a dime on anything. He's got more money than he'll ever need and he's saving it. I have cousins and a brother, and lots of other people who are very well educated, who spend their money like drunken sailors, and who are — I mean, they are educated people who understand — they are financially well educated, and they spend their money like the world will end tomorrow.

And the tax code has no real effect on anything they do, I mean, you know, I think, people are saving, because it's the right thing to do, because they don't want to end up old and poor, or they are saving for their kid's college education, or the four principles that Fred mentioned.


MR. BRUNORI: Five — four, four. Four principles. Imagining another one, I guess. The four principles are very important, but we are going to do that. I mean, if you're a rational, intelligent person, most of us are going to be saving for our kid's education, for home ownership, for health care. With or without the tax code, we can go to a VAT or National Sales Tax, and will still be saving money for all of these things.

And so I wonder what the real — except that the margins, and except for the infrastructure of having a 401(k) to make it easier — I wonder what the real advantages, and I guess that goes to the question as to the tax code, the answer, I don't think it is. I mean, I think only at the margins, it is, and I would like the panelists to address that, and then if Ray gets a chance, I would like to know how the KIDS Account works practically, his idea, if it's modeled after what was going on in the U.K.

MR. BOSHARA: Uh-huh.

MR. BERGIN: Where do you want to go first?

MR. PENNER: Well, I'm of Mennonite Heritage, and I think we have the highest propensity to save of any ethnic group you can imagine. And I would go back to the distributional point I made. I think, even the incentives in the tax code, I mean, you're filling out your tax return. You have a choice of, say, making your Keogh deduction, which is very valuable right now. That essentially gives you a tax cut and it is a tax cut going to people who have a propensity to save anyway. So I really do think it increases national saving.

The other point is that once you do save in these vehicles, they are locked up to some extent. And the assets in these vehicles aren't perfect substitutes for other assets. So I do think that while it's, you know, possible that what's wrong with the tax penalty and so forth, that's another aspect of these things that I suspect does increase savings. So I don't think they are totally ineffective at all.

MR. GOLDBERG: I agree with Rudy. I think, the employer based — I distinguish between individual incentive work, where they're encouraging, "You will need to do something" versus the employer based system, which I think really on balance has done good, and I think, if it's a move to reforming it, sort of opt-ins versus — opt- outs versus opt-ins, I really think that that structure is useful.

I'm more of a sucker than most of us, you — I believe, it's appropriate for the government to exhort certain kinds of behavior. And I think homeownership is a very important value, I think saving for health care is absolutely essential. I think, saving for retirement is essential, saving for education, and as a collective statement of something we ought to care about, you know, I think it kind of works, it can work infinitely better for restructure.

And I think it can work to reach low- and middle-income families far better than it does today. But I kind of give it up as long as there's going to be an income tax system, it's going to happen. And to me, you ought to do it right.

MR. BRUNORI: But would society necessarily disagree with you on your four principles? Those things are very important.

MR. GOLDBERG: Well, if you and I are going out and run, and you're going to try to repeal them all. I'm supporting them, I'm going to win. I mean, that's what people want.

MR. BRUNORI: Right — no, no, that's what I'm saying, is we collectively think homeownership is good, that's why the homeownership rate is 69 percent. I would maintain it. It doesn't have a heck of lot to do. It had something to do with the tax code, but there's other virtues in owning a home than just the tax break on your mortgage.

MR. GOLDBERG: Oh, absolutely --


MR. GOLDBERG: — absolutely.

MR. BRUNORI: So the question is --

MR. GOLDBERG: Same with insurance, I absolutely --

MR. BRUNORI: Now, people who do intend to buy homes, I think, would buy them with or without the tax break, and I think a lot of people who save — forget the infrastructure, I think, is actually more important than the tax incentive.


MR. BRUNORI: Right, the infrastructure of having the 401(k).

MR. GOLDBERG: The infrastructure's key.


MR. GOLDBERG: But Gene and Rudy, there are all these new theories, you know, about embedded — in other words, if you think the markets have capitalized the value of these tax benefits, if you get rid of these tax benefits, at least some people think that you will have a one-time wealth effect, and you'll do great then. I mean, it is so complicated for all of the reasons that Gene is saying and more. I don't buy him.

Again, this is the political question. Who is going to get out there, and tell your homeowners that you've got economic income we ought to tax. I mean, that's just never going to happen, that's simple, bag it. But --

MR. STEUERLE: My point wasn't that you tell that. My point was once you are there, you are already in a world of deductions, and so it's more complex to say you want to move to a credit-based system, because you are in a world of deductions anyway. That was the simple point I was making.

MR. GOLDBERG: I sort of feel like we are in these conversations, we all have to hand out fiddles, because I think we're fiddling. I agree with Rudy, until you take on the bigger issues, this is all noise, but it doesn't bother me to do this in the tax system, like it's okay.

MR. BERGIN: But it isn't the first step, as a society we have decided to encourage certain behaviors --


MR. BERGIN: We could go back to your four virtues, because we think that's important.

MR. GOLDBERG: Good, that's okay.

MR. BERGIN: And the fact that it is difficult to do is — I mean, maybe the code is not the perfect answer, but we've decided not to give up. I want to give Ray a crack in here, because --

MR. BOSHARA: I don't have a lot to add. I think, the incentives do matter, but they're not the most important thing that matters, and I think the better use of those incentives would be to help those who otherwise would not save, and who have from a social policy perspective, the greatest need to save and build wealth. So the KIDS Accounts, you know, how it's working in the U.K. is slightly different than how we propose that it works in the U.S. There is more than one way to do it.

The U.K. system, kids get a voucher, and the family then takes it to a financial institution of their choice. They open up the account. They can have a range of investment options, and they start saving. And it's become a magnet for a lot of other savings as well. It's 250 pounds at birth for all kids, and an additional 250 pounds for the poorest one-third of kids, and at age 18, they can use the money for whatever they want.

That's the U.K. system, and as Bernie said, what surprised everybody is that it has generated a national discussion about financial literacy that otherwise would not have happened. The U.S. proposal that I mentioned would set up these accounts automatically at birth. You wouldn't actually have to go to a bank and open up the account. It would be done for you.

MR. BRUNORI: Who would do it?

MR. BOSHARA: A Federal Thrift Savings Plan like system. It's modeled after the TSP, it's much — it will be much bigger. TSP is about three million accounts. This is — there are four million kids a year born in the U.S. So this is a much, much bigger system.

MR. BRUNORI: It wouldn't be the IRS?

MR. BOSHARA: No. No, no, it wouldn't be --

MR. BRUNORI: And it's not an incentive?

MR. BOSHARA: Right, and they would set up the account, and actually the payments into the account from the government would be done directly through the Financial Management Service. I mean, I think, you want to use the tax code to incentivize additional contributions, but it's more efficient to put the money directly into the account through a payment. Here you have bank problems and, you know, things — all the limits of the tax code that Fred has talked about.

So I think, direct payments, actually — you can actually be doing a lot more social policy outside of the tax code, and through direct payments much more efficiently, much more effectively, and you can have benefits be citizen-based as opposed to employer base. I think, there's a lot of promise there, and then we use the tax code for other things.

If we were going to do reform, I would like to see more use of individual accounts where they make sense done through direct payments, and keep the tax code for incentivizing behavior for people who really do pay taxes. So — but that's kind of our vision of New America is to rethink accounts, individual accounts going forward. So I'll stop there.

MR. GOLDBERG: He's got it except, I think, you would use the tax infrastructure in very important ways. For example, if you get — if you say the bottom third is getting an extra 250 bucks --

MR. BOSHARA: How do you know that?

MR. GOLDBERG: — you've got to identify that.


MR. GOLDBERG: It does like --


MR. GOLDBERG: If you're going to be moving funds around, you got to have Social Security numbers, as an identification point.

MR. BOSHARA: That's fine.

MR. GOLDBERG: So, again, you are using the infrastructure, but not the IRS.


MR. ALEXANDER: Yeah, okay. I'm Don Alexander still.


MR. BERGIN: Still reading the Wall Street Journal already.

MR. ALEXANDER: Well, I really like the last section of Wall Street Journal, the personal stuff, that's good.


MR. ALEXANDER: But getting off the Wall Street Journal, we do have something called a saver's credit. Where is he, he's left?

SPEAKER: No, he is here.

MR. BERGIN: He's here.

MR. ALEXANDER: Oh good, because one of the problems is getting people started. And how do you get them started, and we discussed the automatic election. I think you are in unless you elect out. I thought I heard the — the thought was that you couldn't elect out, of course, you can elect out. It's just the default. The default, if you don't do anything, and most people don't do anything, you're in.

Okay, good idea, save us credit, encouraging people at the lowest grasshopper level to try to save some money. Pretty good idea, it's in the trailer bill. If the trailer bill gets through, presumably the savings credit will get through. It wasn't important enough, of course, to put in the bill that just passed.

On one point on what my distinguished colleague to my left said, "national savings." I mentioned the fact that, if this story is correct, that retirement savings are increasing, and increasing at a pretty rapid rate, and they amount to a very large number indeed. Now, that's just part of national savings.

If we increase the deficit as we are managing to do at a great rate during the last few years, we have dissavings at the federal level, and national savings, I suggest, would include not only the private savings that we are trying to encourage, but if we encourage them at the cost of $1 dissavings to get $1 of personal savings, what have we done for the country? I think, not very much.

Now, back in the antediluvian days, when I was working for Internal Revenue, lo and behold, we had a savings rate of 7 percent plus compared to our savings rate today of zero. And yet, we had a 50 percent top rate on earned income, and guess what, a 70 percent rate on earned income, those hard earned dividends that I mentioned earlier.

Despite that, which would discourage the daylights out of saving, if we were looking at tax incentives or disincentives alone, we've managed a 7 percent savings rate, national savings rate. So does the tax system work going back to the good question we were just discussing? The answer is, "Hey, look at history." Maybe it doesn't. Maybe it would be better not to try to do all this, as Ray just pointed out, through the tax system, but to follow the U.K. example, which sounds as though, one, it's working, two, it's better, and three, it might eliminate or reduce anyway one of the problems that concerns me, and that is noncompliance.

MR. BERGIN: Joe, you want to go?

MR. MINARIK: Don said a lot of what I'm --

MR. BERGIN: You have to also tell who you are though.

MR. MINARIK: Oh, sorry. Joe Minarik from the Committee for Economic Development.

MR. BERGIN: Yeah, go on.

MR. MINARIK: Don Alexander said a lot of what I was thinking to say. We had said — I mean, it seems to me that the question is, earlier as Don said, "Why are we here?" One of the things that I think came through the earlier part of the discussion is we have spent an enormous amount of money through the federal tax system already on "encouraging saving." It used to be the largest tax expenditure in the pile. I think that health insurance has overtaken it, but it's probably still number two.

And as Don pointed out earlier, $12 or $14 trillion worth of retirement assets piled up with a national negative household saving rate, then of course, you throw the federal deficit on top of that, and you're into negative. Somebody mentioned that we — Don mentioned a moment ago that we have a zero household savings rate. That means it's going up, as far as I know, because the last number I heard was negative.

So one question that I think that we have to ask is apart from the issue of dealing with the low-income population, the unbanked population, et cetera, you know, is there any way we get ourselves out of the box we are in now, where we're paying enormous amounts of tax subsidies and getting ourselves net zero, in terms of national saving.

So we've taken our next round of tax subsidies as was mentioned and extended them for another couple of years. There is going to be a policy agenda that seems to me over the near future about how we get out of the box we're already in on the negative side.

MR. BREWER: Hi. I'm Michael Brewer. As somebody who is trying to say, it feels to me like the fifth principle is increased fees for financial institutions. And I'm wondering if the panelists have any thoughts on the fact that all of these savings plans, a portion of the attempt to benefit the savers is going to the financial institutions. I can't find — I have an IRA. I can't find somebody who will give me as high an interest rate for money in my IRA, as for money that's not in an IRA.

I also imagine that I'm paying a higher mortgage rate, because I'm getting the tax benefit. So I'm concerned that the benefits of all of these ideas are being at least partially shifted to the wrong people, not the people intended to be benefited by these plans.


MR. PENNER: I was going to make a different point, but I do think the answer to that is that the design is very important, and that the TSP type design, I think, is really very good for administrative cause, but I want to make a different point --

MR. BERGIN: Go ahead, all right.

MR. PENNER: Just going back to what Don said about the saver's credit, I think, that's a perfect example of how confused the system is that the people writing the law don't even have the first understanding. It's my understanding that the Congress wanted to give a $1,000 credit. But then they put an AGI limit on the 50 percent credit, that nobody who qualifies pays this much of the $1,000 in taxes. I don't believe, I haven't tested that myself, but it just shows how screwed up we have become.

I want to make another point about, again raised by Don. More generally, he talked about this massive amount of retirement saving, but one might ask, you know, here our savings rate that's publicized in the newspaper is negative, and yet consumer balance sheets are in great shape and wealth goes up, you know, all the time. Well, how can that possibly be?

Well, there really is an important measurement issue here. The way we measure saving for the national income accounts is very different than how we measured for the tax law. And as specifically the capital gains are in the tax law, but even beyond that I think our measurements are really confused.

A few years ago, the Bureau of Economic Analysis decreed that they would call the estate tax the tax on capital and therefore it wouldn't be on the current budget of the government's or in current income. But for reasons that just totally mystify me, they didn't do the same with capital gains taxes.

So here we have a savings measure that doesn't count capital gains, but the tax capital gains taxes from the saving concept. So I would really like to straighten that out. There are reasons for having different measures of saving. But I think, we have to really think very clearly as to which concept of saving we're trying to encourage.

The NIA properly measured is what tells you how much you can add to the fiscal capital stock of the country. The tax concept really talks about people's — individual people's wealth and their command over resources. And I think it's important to separate all that out.

MR. CALABRESE: Yeah, Michael Calabrese with the New America Foundation. That — yeah, it is a good point that Rudy made. I mean, one thing I was thinking when Don mentioned, you know, that we have gone, say, you know, from 7 percent down to zero or negative. Now, is that — we see as an income measure that may even be worse, really I think it is worse that it even appears when you consider the demographics, which is that back in the, you know, in the late 70s, 80s the baby boom bulge in the adult population was in its household formation early child-rearing years.

And so today to have a zero percent savings rate when the — when that big bulge in the adult population is in its, you know, late 40s and 50s, which should its prime saving years, you know, seems even more worrisome. So that would just be a prelude to — I just want to make explicit, kind of putting, maybe putting together what - - and ask for some reaction, you know, what Fred said. On the one hand I like very much the idea of the, you know, the flat rate refundable credit. And also what Ray is saying about infrastructure for saving.

But, you know, I think we should — it's incredibly important to do it for kids, children's savings accounts, we can — you know, with a new generation we can break the cycle both of — hopefully of inter-generational poverty as well as savings behavior. But, you know, I certainly don't want to write off all the workers today, so I'd love to be able to combine the infrastructure that Ray described, which meets those institutional factors of saving like the access, the incentives, the facilitation, things like payroll deduction, automatic, and combine that with the refundable credit that Fred has described.

And I think we bring those two together, then we can give everybody, every worker and every family today the equivalent of a 401(k), you know. And so we go to do the plumbing, we've got to put the plumbing with the credits I believe. But, you know, any reaction to that from the panel would be great.

MR. BERGIN: I just want to go back to the question from the gentleman in the audience, because I don't think we answered your question, but I will try. You hear a lot from the politicians about how they care about how we save, but when you are starting out and you are trying to save, I think you feel the opposite. You feel like nobody really cares about you. They are just talking at you and you would prefer that they just shut-up.

It's not easy and when you are down at the bottom of the income scale, at least by personal experience, because you feel like a sucker. They keep talking about how much they care, and they don't do anything for you. The latest obscenity is what they just did. There is nothing in the current bill that I see that helps you a bit — helps me a bit — but people with wealth that helps quite a bit and probably more.

So I feel your frustration, I don't think I have a good answer for you, other than the system is broken for those who are starting out and trying to save. Would you disagree, Gene?

MR. STEUERLE: No, no, I don't. I guess I was going on to another point, so do you want to continue on that?

MR. BERGIN: Okay. Gene agrees with that. Then we are — at least we feel your frustration.


MR. STEUERLE: The point I was going to go to is it still bothers me that — I mean, again we were talking about some of the fixes to promote saving, but again I think we are being a little bit more politicians than we are sort of rigorous analysts. The system is a mess in part because we have — and this actually does relate a little bit to your question.

We have basically about 40 or 50 different savings provisions in the tax system. I've — with Pamela Perun I did do this diagram that makes the Clinton health plan in 1993 look simple. I mean, it's — you know, it is like the number of options out there, I mean, literally there are dozens and dozens, and unless we are willing to clean this up. Now, that was actually one of the advantages — I don't think Treasury did it right because they gave away the ship. But that was one of the advantages of their attempted LSAs and RSAs was they were trying to clean it up, but then they typically ended up — they decided that they couldn't cut back on anybody's benefit anywhere, so they really didn't get to clean up the waters.

So if we are not willing to do that, then we are going to get some of these losses because the system is so confusing that, you know, one or two percentage points out of every return is basically going to be just lost to these people who are out there trying to figure out the system and explaining it to us. And actually the less educated we are the more likely we are to be in banks, say, than mutual funds which means when we get, you know, half a percent or percentage point less on our bank account for instance just on — you could go on and on about how the confusion is as to the system.

But I also wanted to answer Joe's question, refer back to this issue. Another thing we're not willing to attack is the issue of debt, you know, we don't have incentives for saving, we have incentives for deposits. That explains in part the thing that Don and Rudy were getting at, is why can't you have all these trillions of dollars in assets and financial assets going up. And savings rates being zero, it is not just capital gain. It is just because there is borrowing on the opposite side.

A lot of the money that goes into pension plans does nothing more than go out to the other side of the ledger and is borrowed to finance consumption, and it's not financing net saving. And we — when we allow us and most of us who have been in this game — you know, we take our mortgage interest deductions where we are depositing in 401(k)s, we are totally arbitraging the tax system. That's not net saving.

And that's something IRS could do today, they could require that your 401(k) account report your interest and your dividends, and not allow your interest deductions to the extent you've got capital income on the other side. I mean, we could get it, some of this, if we really wanted to, and we could get some of the simplification if we wanted to.

MR. GOLDBERG: Chris, if I can try to answer your question directly and again at risk of great peril, I believe for the most part the capital markets are very efficient. There is a sufficient number of financial intermediaries out there for competing to your money — competing for your money that all else — all things considered I think the systems works very well. I think where it breaks down is Rudy's point.

For example, 529 plans, states confer monopoly on a single provider, and they couple that monopoly — like in Maryland, for example. You go to T. Rowe Price. I'm not sure that the T. Rowe Price pricing structure is particularly competitive. But I get a tax deduction from the State of Maryland. Well, the taxpayers of Maryland are getting screwed, right, I mean, they are subsidizing effectively the extra cost they may have to pay.

So — but I think if you leave the markets alone, they work reasonably well. There is a rhetorical trap that I believe we have now fallen through completely, which is all of these conversations we are now talking about, who deserves, who needs it, giveaways to the rich. And I believe that that rhetorical device is an enormous mistake.

And just to pick one example, yes, indeed, high-income individuals benefit from the lower tax rate on dividends. I personally believe that that is one of the best single policies Congress has enacted in 20 or 30 years. John Kerry, before he was running for President said, "You should eliminate the double tax on corporate earnings." I personally believe that that provision over the long run will do as much or more for corporate governance than Sarbanes-Oxley. And I think we need — I don't have the same kind of rigor Gene has and I find some of the things he says little bit hard to get my head around. But I think the — that to test every single tax provision by who gets the benefits is a — is just wrong.

And so I would be careful about some of the rhetoric that we are sort of sliding into here, Chris, because I --

MR. BERGIN: Okay. But the frustration is real, you would agree with that?

MR. GOLDBERG: Well, the frustration is real, using a tax cut to pay for a tax cut is bizarre to describe it kindly.

MR. BERGIN: That's very kind, yes.

MR. GOLDBERG: And — but I do think we need to be — we need to be principled at least about some of the things we are trying to accomplish here. And it is thrilling that all of you seem to think this universal refundable credit idea is a good idea because that means that Bill Gates is going to get a credit on his $3,000 contribution to the IRA; it's going to be the same dollar credit as somebody else. I mean, you know, you could jump on that, and say, "Well, universal flat rate credits are terrific, refundable, except nobody making more than $100,000 should get them." That is not in my view the right way to think about these issues.

MR. BERGIN: No, but I actually do think your credit idea is a good idea. And one of the reasons I personally --

MR. GOLDBERG: Including the universal feature?




MR. BERGIN: And — but that's just me, Fred, I mean, you know — but — in part because it's something you could put your hands around. Now, you can't put your hands around pabulum; anytime you try to grab the pabulum the politicians give you, it just squirts around and it makes people more frustrated. I agree with your point about the rhetoric and I will try to be more careful. But again, what I like about your idea is it gives people something. It gives them something to hold on to. And talk is, as we say, cheap. There was somebody in the back that I wanted to recognize and I'll come around again.

MR. ESTRADA: Having been a fat man forever --

SPEAKER: Who are you? Tell us who you are.

MR. ESTRADA: Arturo Estrada. Having been a fat man forever, it has become very clear that I don't need any encouragement to reach for that second pork chop. For that matter I will reach for the third pork chop without anybody encouraging me. There comes a point when we think about people who make substantial money, that they don't need further encouragement to save a little extra money.

Everyone should be encouraged to save regardless of how much money they make. But if we are talking about truly encouraging, about working at the margin, there comes a point where even I can only eat so many pork chops. You can only buy so many suits, and there is a functional limit to how large your house can be.

Are we discussing here in addition to encouraging low-income folks to save, limits on the extent to which we want to encourage the person making $400,000 a year to save more? There comes a point where they are not going to spend it. What are they going to do? Stuff it under the mattress? They may want a greater return under equity and the tax savings will increase the equity, but I have yet to meet a rich man who will say, "I'm not going to settle for six percent, I want seven, and if you won't get me seven, I'll settle for zero." They are going to save it; they are going to invest it. There comes a point where they don't need the incentives.

MR. BERGIN: Go ahead, Norm.

MR. KURLAND: — is the Tax Code, in answer, I agree, emphatically no --

SPEAKER: Identify yourself.

MR. KURLAND: This — I'm Norm Kurland, with the Center for Economic and Social Justice. My answer is no, not at all, for the reasons that Don Alexander gave. There is — and we ought to move from the ideas of tax credits to capital credit. And think about, there was a book written 71 years ago at Brookings by the president. It was called The Formation of Capital, by Harold Moulton.

And he points out the reasons that the weight of finance growth was not out of the tax system, but out of expanded bank credit and the role of the Federal Reserve, in terms of controlling monetary policy and interest rate policies. Obviously, this group is — wants to confine itself to discussing the tax system without recognizing it's a part of a larger infrastructure. I happen to agree with Ray Boshara that that it is the institutions that are going to affect behavior in savings.

I also agree with Rudy Penner that the economic effects of the tax gimmicks that are used to facilitate or encourage savings are ambiguous and I agree with Fred that the income tax is the best. But I don't agree with the refundable tax credit because I think we have to start thinking about capital credit, and how to have a tax system that will allow people to accumulate in a tax-free way, and have equal access to a portion of the capital formation that takes place, which is roughly about $2 trillion a year in both the public sector and private sector, and finance it through Section 13 of the Federal Reserve Act, which was the original way in which you would link the expansion of the monetary supply to capital. But do it through — you could call it IRAs, or I call it Capital Homestead Accounts, so that from the time of birth people would be able to get an equal allocation.

So I agree with the equality of access. But equal — and I — if you divide up the $2 trillion a year, your roughly $7,000 in new capital formation in the public and private sector — I'm modest, so I say $3,000 would go to every individual, they go to their local banks, set up their Capital Homestead Accounts, get $3,000 worth of interest-free credit.

MR. BERGIN: You got a question for the panel?

MR. KURLAND: The question for the panel is, why not think beyond the tax system in order to — you have Moulton talking about it. And my mentor Louis Kelso, who happened to have been the inventor of the ESOP, wrote a book which said "how to free economic growth from the slavery of past savings." And so until we begin thinking beyond the tax system, you are never going to solve the problem.

MR. BERGIN: Well, all right, we are having enough trouble here with the tax code.


MR. BERGIN: So I'm — go ahead Jim, I will give you one more here.

MR. WHITE: I just wanted to follow up on the point that Gene made about analysis. There is little — and it goes back to something Rudy said at the very beginning to this. I'm Jim White at GAO. We don't have a very good understanding of the effectiveness of the various provisions built into the code right now. I wonder how much we actually know about the long-run effectiveness of some of the facilitated savings plans that we have been discussing. I think we know something about take-up rates. But I don't know how much we know about the long-run effectiveness of those things.

So that's one area. I think part of the reason for the lack of research is lack of demand for this information about effectiveness. We do talk about the fairness of these provisions a lot. And often what gets less attention is whether they actually are effective in the long run in what they are intended to do.

MR. BERGIN: I'm going to close and let each of the panel members make a comment as we go around. I want to make an observation before I do that. We have done several of these on a whole multitude of issues. I think it is fair to say this is the most difficult one we've had. And I didn't think it was going to be coming in. The answers here apparently are the most complex, and Gene, I think you have been at just about every one of these that we have run into. I appreciate the comments of the panelists. I don't know if this is a problem in the tax code, but just based on how difficult this topic has been today this is a problem for the country. That seems clear to me.

I'm going to start in the same order that we started at the beginning and let each of the panelists comment and then I'll come back to myself, I guess. Rudy?

MR. PENNER: Well, I think the last point is very important about both Fred and Ray's kind of proposals. I have been extraordinarily impressed at how hard it is to get lower-income people to save. I have been involved in the Canadian experiment that Ray talked about. We offered these huge matching grants, free money; nobody shows up to take them. The participation rate was really low until Chinese immigrants found out about the experiment. They flooded into the system showing that necessity is important in the saving decision, I think.

Similarly, the Germans reduced their social security benefits and created a subsidized individual account, the so-called Reister account. Good subsidies, no — hardly anybody is taking it out. So maybe that goes to the question of defaults, but I think that may be too simple-minded. There is just something in the nature of the human condition that makes it very difficult to get people to save, and I think especially when they don't have a lot of resources for consumption.

MR. BERGIN: Yeah, I think that's a good point. Fred?

MR. GOLDBERG: I guess I would end with the fact that my father sold plumbing supplies in St. Louis. And to me plumbing is — infrastructure is everything. And I think we need to pay far greater attention to the infrastructure because if you build the infrastructure, if there is an account, if something matters, I believe the rest of this follows. And I think there is an — when you think about 80 percent of the Katrina victims with no bank account, when you think of 20 to 40 percent of Americans with no bank account, what we are seeing is that there is an — I analogize to the Interstate Highway System or the Internet. You build an infrastructure and it can be used over time.

And I believe we have no effective infrastructure that reaches 20, 30, 40 percent of our fellow citizens, and I would spend every nickel I have in building that infrastructure, and then I'd worry about the rest of the stuff. I think in an income-tax system in our country, home mortgage subsidies, savings, and subsidies to encourage savings for — it is as sure as the sun is coming up. And I would start by saying that is a reality. And then I would say, how do I do it best?

Third, I think I'd comeback to Rudy's point. We are inexorably going — I mean, this system can't survive the whole imbalance in terms of deficits. The commitment we have to the baby boomer generation, it is a slow-motion catastrophe.


MR. GOLDBERG: And I think a key to dealing with that issue is fundamental tax reform, and the longer we fiddle the worst it is going to be.

MR. BERGIN: I think that's a great point. I think part of the problem is that this just isn't going to be one bang, it's slow and slow and slow, and it is not getting anybody's attention. Ray?

MR. BOSHARA: Yeah, those are great comments. I would just note that the take-up rates in matched savings experiments around the world were incredibly slow, and a lot of it was just disbelief by low-income people that anybody was giving them free money. They thought it was some sort of a scam. But once the word got out that these programs were legitimate, then, you know, the uptake was quite good. And there is now actually a far greater demand than there is supply of matching subsidies for these programs.

So — and it was such novel idea nobody on the low end knew what to make of it. But I think the evidence is overwhelming from the experiments here, in the U.K., in Taiwan, now in Africa, that low- income people, just like anybody else, will save if offered the opportunity, if they have access to the infrastructure.

So I don't think income is really what we should worry about and consumption needs. I mean, these are all very valid issues. But I think this is a really — this is a breakthrough idea that people of any income can save if you put the institution or mechanisms in place to make it easy for them to save. And then you combine that with these amazing insights from behavioral economists about, you know, to getting defaults right and inertia in doing things for people. And I think the potential to increase savings in this country is greater than it was even two or three years ago. We have learned so much in the last few years about what works to increase savings.

And it's amazing, you don't have to spend a lot of money. You can set up an infrastructure, you can do auto IRA, you can do split refunds, you can do auto 401(k). These things don't cost a lot of money, but they are tweaks to existing systems that will generate lots of new savings. And so while we lay the foundation for fundamental tax reform, which I hope we have, let's do everything that we can right now to make savings more likely.

MR. BERGIN: Well, thank you for ending this on positive note.


MR. BERGIN: Let me thank this distinguished panel of speakers, you guys were great, and remind everybody, if you have a chance, to fill out the survey. And thank you for coming.


(Whereupon, at 11:01 a.m., the PROCEEDINGS were adjourned.)