Saturday, January 26, 2008

Spend Thrift?


With lightning speed, the House managed to cobble together an economic stimulus package last week, the Senate will take it up this week, and President Bush seems anxious to sign it. Even more amazing in the current political environment (and in an election year, no less), there appears to have been true compromise on both sides of the aisle in pulling it all together.

But for those of us who focus not only on the importance of saving for retirement, but on trying to remedy the inefficient (and non-existent) savings behaviors of working Americans, there were huge ironies in the logic behind this particular stimulus, IMHO.

I fully appreciate the economic spiral that sometimes sets in – people get worried about their personal finances, quit spending on non-essentials, which leads to less revenues for businesses, whose employees get worried about THEIR personal finances, and who subsequently quit spending on non-essentials, which leads to…well, you get the point. I’ll also confess that my blood pressure rises dangerously every time I fill up my tank (there’s something wrong when a non-SUV costs more than $50 to fill the tank). Clearly, lawmakers figured that they needed to do something before everyone who was already “mad as hell” decided to “do” something (like elect new lawmakers).

Mixed Messages

So, what’s inconsistent with this message? For starters, the government wants people to spend these “rebate” checks – and spend them NOW. Indeed, there was concern about it being given to people above certain income levels (families making more than $174,000/year will get no rebate) because – they would be inclined to save or invest it, rather than spend it. Contrast this with the message of most enrollment meetings – how one should forgo that cup of Starbucks or that movie rental for an investment in long-term financial security. A little now adds up to a lot later on, right?

Secondly, there was a desire on the part of some lawmakers to extend this “rebate” to every working American – including those who don’t actually pay income taxes. What that means, of course, is that for them (and it’s a remarkably high percentage of Americans) this isn’t a “rebate” of income tax (they already have all that is withheld returned to them when they file) – it’s essentially a return of their FICA (Social Security) withholdings. Not actually, of course. That’s merely the rationalization for why they should get one of these checks (though what else could we be rebating?). Little wonder we tell folks that they need to prepare for the eventuality that Social Security won’t “be there” – at least not in its current form - when they retire.

“How” Now

Finally, what isn’t being said out loud – but has to be a concern for those banking on this stimulus package to live up to its name – is how people spend it. Specifically, they would prefer that people not use the rebate to pay down debt.

We all know the impact that debt can have not only on people’s ability to save for retirement, but on their current financial situation. We also know that taking a loan against one’s 401(k) plan balance, while frequently characterized as “borrowing money from yourself” is really just another case of “borrowing from Peter to pay Paul”. Still, our industry has been largely persuaded that workers won’t contribute to 401(k) plans if they don’t have some way to tap into those funds in an emergency.

There’s some reason for that underlying concern about rebate spending on debt – recent history, in fact. The government did something similar in 2001 (basically as an “advance” on the 2001 tax cuts). Government data indicated that only about 20% of the rebate check money was spent by consumers – and 60%, was used to repay debt. Of course, in 2001 just $38 billion was distributed in rebate checks (0.4% of GDP), versus $100 billion this go round (0.7% of current GDP). Paying off debt is not a bad thing, by the way, though it’s not likely to provide the intended economic jolt.

It remains to be seen if the stimulus package will work – and it’s by no means certain that the situation will feel as dire (or that it won’t) by the time the checks actually arrive (June is the current estimate). I also realize that there is a difference between trying to stimulate the economy and focusing on long-term financial security.

Still, I can’t help but think that the government’s response is promoting the kinds of behavior we would typically scold participants for; spending, rather than saving – and spending retirement savings, to boot.


- Nevin E. Adams, JD

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