Tag Archives: retirement

Protecting Retirement Savings

Supreme Court rules IRAs can be shielded from creditors,” CNN, 4 April 2005, http://www.cnn.com/2005/LAW/04/04/scotus.bankruptcy.ap/index.html.

Sometimes a kind policy and a wise the same thing. This is one of those times.

The Supreme Court on Monday ruled that creditors may not seize Individual Retirement Accounts when people file for bankruptcy, giving protection to a nest egg relied upon by millions of Americans.

The unanimous decision sides with a bankrupt Arkansas couple fighting to keep more than $55,000 in retirement savings. As a result, IRAs now join pensions, 401(k)s, Social Security and other benefits tied to age, illness or disability that are afforded protection under bankruptcy law.

IRAs should not be treated any differently because the benefits are tied to people’s age, the court said.

I can’t comment on the points of law, but this is a great decision. It is important to raise America’s savings rate, and retirement savings is a great way to do this. However, if individual retirement accounts were subject to bankruptcy seizures, less people would use them. If creditors could take them, this would increase their risk and decrease their attractiveness.

With this decision, the Supreme Court furthers a 21st century economy. Centrally controlled pension systems have had this protection for decades. Now individual investors also share in their benefits.

Prefunding Retirement (Paul O’Neill on Social Security)

A New Idea for Social Security,” by Paul O’Neill, Los Angeles Times, 15 February 2005, http://www.latimes.com/news/opinion/commentary/la-oe-oneill15feb15,0,3297856.story?coll=la-news-comment-opinions.

Former Treasury Secretary Paul O’Neill begins conventially enough…

To be clear, this is a decision for our society to make. The U.S. government is just the instrument to bring it into effect. There are two crucial facts that distinguish this idea from traditional Social Security. The savings would be owned by the individual, and every person would have an account. (Everyone born before the plan went into effect would remain under the current Social Security system.)

But then, the genius (assuming it’s not insanity that I’m not seeing clearly)

If we decided as a society that we were going to put $2,000 a year into a savings account from the day each child was born until he or she reaches age 18 — and if we assume a 6% annual interest rate — each child would have $65,520 at age 18. (The worst return for a 25-year investor in the stock market from 1929 before the crash to 2004 was an average of 6% a year.) With no further contributions, again with a 6% interest rate, those savings would grow to $1,013,326 at age 65.

If we began to do this now, the first-year cost would be $8 billion; that is $2,000 times the roughly 4 million children born each year. The second year would cost $16 billion and so on until we were contributing $2,000 per year to a savings account for every child from birth until age 18. When fully implemented, the cost would be $144 billion per year. To put this $144 billion per year into context, this year’s combined spending for Social Security and Medicare will exceed $750 billion.

A long-term solution for a long-term problem. I like it.