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.
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.
posted by Aric at 6:39 PM
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