The COVID pandemic has shown that savings are crucial when people are confronting unexpected circumstances. But often, a chunk of people’s savings is locked away in retirement accounts, thanks to financial regulations.
That must change. People grappling with difficult times should decide when and how their retirement savings can be best used—not members of Congress. We should permanently waive the 10% penalty on early withdrawals.
Setting aside funds for retirement is important, but using part of that money before retirement—such as to prevent an eviction, pay down debt or fix a car to get to work—can be more beneficial than keeping it stowed. Congress should allow people to save and withdraw their savings for any reason, at any time, without limitations. People need more economic freedom and less federal paternalism.
The dominant view holds that people will squander their money if they don’t face withdrawal restrictions, which will leave Congress with no option but to raise taxes to help support the growing tide of impoverished elderly citizens on Social Security.
But such restrictions insult the intelligence and integrity of millions of people. These rules assume that people are incapable of understanding their own circumstances and interests, as well as basic financial concepts. It is a condescending and false view.
Consider this: When Congress waived the penalty on early withdrawals last year, relatively few people opted to tap their retirement funds. It seems as though savers have more restraint than lawmakers and advocates give them credit for.
It is true that people may sacrifice returns in their retirement accounts after making early withdrawals. Some critics argue that the consequences of this could be dire—people might be forced to work many years more than they had planned, for instance. So, the logic goes, rather than being allowed to take early withdrawals, people should be forced to do things like tap home-equity lines of credit or cut their spending.
But it is also possible that new rules, ones that allow people to put as much money as they want into retirement accounts, could spur them to put more funds into their plans after they make withdrawals. And that might allow them to more than make up for any losses.
As for the suggested alternatives to making withdrawals, it’s far better to let people assess the risks and make choices about their own money, instead of dictating what they can do.
Social Security provides a good example of what can go wrong with federal regulations on retirement saving—it’s paternalism on steroids.
With Social Security, the government tries to ensure that people have some money when they retire by dictating how they can save. But this is a much worse deal for workers than simply letting them control their own money. Social Security delivers a comparatively lower return than a private savings account, and people who die before retirement, or early on in retirement, lose all the money they put in. (And, of course, the money they put in isn’t really for themselves in the first place, because their contributions actually pay for other retirees.)
If people were able to save their own Social Security contributions, these two problems would be mitigated, at the very least. And because people could control their own money, they would have an incentive to save more than they would otherwise. For the same reason that people are hesitant to book nonrefundable flights, many hesitate to lock up their savings in restricted retirement accounts.
To be sure, it’s understandable to feel we have a moral obligation to help fellow human beings make it through retirement. But it doesn’t follow that assigning the government the authority to usurp individual freedoms is the best way to accomplish the goal. In a free-enterprise system, people will develop ideas and start businesses to help others because that’s what earns them a profit—such as creating an app that helps people track and manage savings.
In both Canada and the U.K., unrestricted retirement accounts actually induce people to save more, with lower-income and younger workers the most likely to take advantage of such opportunities.
This evidence contradicts the notion that people are incapable of gaining basic financial literacy and saving for themselves. Moreover, it demonstrates how federal paternalism prevents Americans from becoming financially secure and moving up the economic ladder.
People don’t need federal rules to tell them what qualifies as a socially acceptable time or way to spend their own savings.
This piece originally appeared in The Wall Street Journal on 02/06/21