Last week, the well-known data provider Bankrate made headlines when it reported that, according to its monthly Financial Security Index, a remarkable 36 percent of American adults have not begun saving for their retirement. Writing in today’s Wall Street Journal, Amity Shlaes of the Coolidge Foundation and Chris Edwards of the Cato Institute note that one way to promote more saving and investment would be to adopt a version of Canada’s Tax-Free Savings Account (TFSA), which has proved highly popular north of the border.
Like a Roth IRA, a TFSA allows people to contribute after-tax dollars to a retirement vehicle and then make tax-free withdrawals. But whereas Roth IRAs (1) have income-based eligibility thresholds and (2) impose steep penalties for early withdrawals, TFSAs are open to all Canadians, regardless of their income, and TFSA funds “can be withdrawn at any time for any reason with no penalties or taxes.” Meanwhile, write Shlaes and Edwards, the annual contribution limit for a TFSA, which is currently $5,500, “carries over from year to year if a citizen doesn’t reach it. So if a Canadian contributes $2,000 this year, he can put away up to $9,000 next year ($3,500 plus $5,500).”
The authors recognize how controversial it would be to launch a Universal Savings Account modeled on the TFSA, and they address two potential objections:
“Some critics might charge that a Universal Savings Account can’t be ‘pro-family’ if it also benefits unmarried millionaires. We disagree. Tax policy is not a tug of war between families and singles: All can win. The autonomy these accounts offer to everyone will make families become — and think like — millionaires.
“Other critics will warn about revenues lost decades hence when Americans withdraw tax-free. But shortfalls in the future may well be made up by the growth that would ultimately flow into federal coffers. The growth that comes from more savings and investment will raise living standards. And Americans, single or in families, middle class, lower-income or affluent, would become more self-sufficient.”
The whole piece is worth reading.