A Solution for Income Inequality? Minimum Investment Accounts (MIAs)

President Obama and the Democrat Party have bright lined rising income inequality in recent years as their new battle cry for an expanded progressive agenda of more federal spending on new programs such as increasing the federal minimum wage from $7.25/hour to $10.00/hour.  This increases income from $14,500 to $20,000/year with no guarantee the individual will invest for a secure future and no guarantee the employer will be willing to hire people at those wage levels.

I  proposed below a market-based alternative solution that can guarantee a secure retirement if over 100 years of free market financial history is a reliable guide.  But first, let’s briefly establish the cause of the President’s recent focus on income inequality.  Since 2009, the US Federal Reserve, with enthusiastic support from the Obama Administration, has embarked on a New Keynesian monetary policy and directed the US Mint to print $3.9 trillion out of thin air as if money does indeed grow on trees. (Feb. 27, 2014 Federal Reserve Portfolio).  This $3.9 trillion in aggregate over four years represents 23.8% of current GDP (5-6% of GDP/year).  The Fed handed roughly 50% of this money interest free to buy Treasury bonds to keep interest rates low and fund $1.0 trillion of annual government deficit spending resulting in 60% growth in federal debt/GDP now standing at 101% debt/GDP.  The Fed used the other 50% to bail out commercial banks (and their executives) from ownership responsibility of troubled home mortgages by buying these mortgages at face value.  In doing so, the Fed has significantly reduced mortgage payment pressure from roughly 10 million households covering 25 million Americans.  (see OS Post: 2014 State of Our Government Dependence).  What do you think happens to commodity, housing, and financial asset prices when your Federal Reserve prints 5-6% of GDP/year and invests that new money supply in the economy to fund government spending ostensibly to help those in greatest need?  Prices go up.  And who benefits most when prices go up?  People who own assets.  The President and Democrat Party would be well served to take a freshman year Economics 101 class and focus on policy solutions that create more asset owners who benefit from your asset inflationary policies.

The solution to create more asset owners is simple: make certain all Americans invest a minimum amount of every paycheck into a personal investment account.  I suggest $10,000/year adjusted for inflation.  A 22-year worker who invests $10,000/year of pre-tax income into a 401(k) retirement account that tracks performance of the Russell 3000 or S&P 500 index could generates a 5.3% real rate of return (after inflation) based on historical performance of these indexes since 1900.  This wise young American worker would have $5.3 million in the account when they turn 62 in 30 years, or $1.975 million in present value terms.  Just invest $10,000/year for 30 years.  That’s financial and personal freedom in retirement.

401(k) plus $10k matching

How do we get there? Create a $10to100 minimum investment account (MIA) program for all Americans that prioritizes an investment of $10,000/year of the first $100,000 of individual filer income into a federally-qualified, personally owned and directed investment account.  Practically speaking, how do we execute?  Let’s supplement the current federal minimum wage with the $10/100 MIA program and make MIA a memorable historical term in the right way.

1. Re-direct social security taxes (12.4% of income up to $117,000 < $10,000/year) into the individual’s MIA account every paycheck.  This tax amount includes individual and employer contributions to Social Security.  Just remember the government is not saving any of your current tax payments to pay you when you retire.  We could limit this Social Security tax re-direct only to individual filers earning $80,000/year or families to $160,000 of income to make more progressive.

2. For workers earning a minimum wage of $7.25/hour, give employers a refundable federal income tax credit for paying $3.00/hour ($6,000/year) into the worker’s account.  This could be tied to the worker’s on-time or other measurable performance in a periodic bonus that builds team accountability and strong culture during the year.  By supporting a refundable tax credit at the employer’s discretion, we, the taxpayers, are investing in and motivating every minimum wage worker to realize their full potential so they can enjoy the American Dream.   The employer has an expense-neutral proposition.  They pay more in compensation, but pay less the same amount in federal income taxes.  A minimum wage worker earns $14,500/year so the individual-employer combined Social Security tax contribution to the 401(k) account is $1,800 (12.4% of $14,500).  So we can add $6,000 from this employer tax credit and the worker now has $7,800/year invested in their MIA.

3. Allow minimum wage workers who select high deductible health plans to direct up to $2,000/year/family of insurance premium (eg foregone employee compensation) to the retirement account.  Employers will find a way to negotiate high deductible policies with insurance companies or set-up self-funded plans with reinsurance carriers to allow minimum wage workers to allocate $2,000 of premium to these retirement accounts.  Kaiser Foundation 2013 Employer Benefits Survey.

We now have a clear pathway to enable all Americans, especially minimum wage workers, to generate $10,000 of income that is guaranteed to be invested in personally-owned and directed retirement accounts that can appreciate over a 30-year timeframe and provide a secure retirement free of the government.

Summary:
1. Support private investment of social security tax payments for the first $80-100,000 of individual income. (<$10,000/year).
2. Provide employers a refundable tax credit of $3.00/hour ($6,000) for minimum wage workers invested in the account.  Let’s celebrate and reward performance of our entry level team members!
3. Allow minimum wage workers to invest $2,000 of insurance premiums for high deductible policies into the retirement accounts.

Come on America!  Let’s solve income inequality by bringing millions more Americans on board Team USA with a long-term investment in our nation’s well-being.

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