Friday, February 25, 2005

Roth IRAs are bad public policy

(Part 4 of 5)

So, having established that there is no significant benefit to having a Roth IRA for an individual, is there any public-policy benefit to them?

They look tax-free, which might encourage people to save more than they might otherwise, and that’s usually good.

On the other hand, the taxes in a Roth IRA have been paid up-front, and if the owner holds the account until retirement, no further taxes will be paid on the balance. This has the effect of creating a large group of people who don’t care what happens to tax rates. This is not a good recipe for sound fiscal policy. Not only that, but I fear that because Roth IRAs are only the right thing to do when tax rates go up, people who have them will subconciously want that to happen.

A final, even more important note: Let’s consider Ted, Neal, and Ralph again.

Ted gets his $1000 and puts it into his Traditional IRA. There’s now an additional $1000 out in the economy, funding businesses, being loaned to homeowners, or doing whatever else savings do. Meanwhile, Ralph and Neal each give $250 to the government and put $750 into their accounts. There’s now only $750 out working in the economy while the government spends $250 on [pick your favorite government-sponsored boondoggle]. Multiply this by over a hundred million taxpayers, and this leads to slower economic growth. Roth IRAs first appeared in the late nineties, right before the economic slowdown of the early 21st century.


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