Give A Sucker An Even Break

Borrowers and savers are equally essential to viable credit markets. Yet government policy, and industry practice to a lesser extent, have tilted decidedly in borrowers' favor. For a stretch that seems finally over, interest rates have been held exceptionally low. In the runup to the 2000s mortgage crisis lenders extended low-equity, outwardly low-cost loans, which borrowers would be able to service only if the friendliest conditions prevailed, justified by both sides' absurdly predicting ever-rising collateral values.

When the inevitable defaults loomed lenders agreed to "short sales," sometimes collecting far less than owed, and Congress excused borrowers' forgiven debt from being taxed as income. More recently, COVID-related programs granted forbearance and other assistance to home, auto, and student borrowers. Now some student loans may be forgiven, albeit not those already repaid. And little helps those owing money more than our current inflation, fueled by excessive earlier federal largesse, that lets them repay in cheaper dollars. Borrowing has evolved into a high upside, low downside pursuit.

Through it all, savers were getting financially sucker-punched. Think of someone who, not so long ago, could have expected 6% yearly interest on longer-term CDs, amid no serious inflation. A $400,000 nest egg from a lifetime of sacrifice would have yielded $2,000 in extra monthly income, while leaving principal untouched and purchasing power mostly intact. But Fed policy over the past dozen years has left savers reaping a tiny fraction of that. Consumer spending surely suffered as retirees and others curtailed buying to save more, facing the double whammy of expecting to need higher principal going forward along with ever increasing interest income to offset inflation. Near-zero interest rates enhanced the immediate nominal worth of savings in bond mutual funds, but being taxed at lower capital gain rates when drawing from taxable accounts loses some allure when the money retrieved has less value.

Indeed, via direct taxes and a ruinous stealth inflation levy, savers will keep picking up the tab for the borrowers' bonanza. So let's do something for households whose willingness to forego consuming all they produce today enables other households to consume, and businesses to invest. Following are a few of our suggestions for improving the lives of beleaguered savers.

1. There is no justification for allowing some people to do more tax-advantaged saving than similarly situated others. Yet while current federal tax laws let anyone with "earned" income contribute to a traditional or Roth IRA, only with employer sponsorship can money be put into some saving vehicles. Someone making a living through multiple part-time jobs is likely to be legally constrained to saving a tax-sheltered $6,000 in 2022, through the universally available IRA, while a nonprofit or public sector worker could conceivably add an extra $41,000 with 457 plus 403(b) or Federal Thrift Savings plans on top of an IRA, and those at private firms with 401(k)s could exceed the IRA limit by $20,500 plus possible employer matches. Congress should instead empower any employed individual to put into an IRA the collective total permitted with the best employer options, which would be $47,000 this year ($61,000 for those 50 and older).

In fact everyone should be able to bypass employer-sanctioned offerings and save, up to their allowed total limits, in their own IRAs, including the untaxed moving of existing balances at work to their personal accounts. A saver might not like the employer's provided choices, or might seek to move money to meet a minimum asset total with a preferred trustee. 401(k)/403(b)/457/FTS plans are not identical to IRAs, but their features are sufficiently similar that their balances can be rolled into existing IRAs when savers retire – so why not earlier?

We do not make this recommendation lightly, because work-based plans with opt-out stipulations have proven effective in getting young workers to save, and losing assets to employees' own IRAs could leave a workplace plan too small to manage efficiently. And, admittedly, someone working multiple jobs might struggle to reach the IRA limit, let alone save more. But fairness demands a level playing field; it seems un-American that employers should be gatekeepers for whether and how citizens can save their own money, with tax benefits, for retirement.

2. There should be no income limits for Roth IRA contributors. There is no income cap for traditional or Roth employer plan participation, so any IRA income ceiling places someone without the right job at a relative disadvantage. "Backdoor" conversions of non-deductible traditional IRAs to Roth, encouraged by some advisors and tax professionals even if not yet definitively IRS-approved, impose administrative costs that would disappear with the income constraint's removal.

3. A taxable account saver with $X in an index fund should be able to sell the shares and then buy $X worth of a competing company's mutual fund or ETF that tracks a similar index, with no taxable gain or tax-saving loss booked. This rollover treatment would let those who lack the wealth to broadly diversify outside of index funds consolidate accounts, or switch to managers with better perceived service. After all, transferring a portfolio of individual securities to a new advisory firm is not a taxable event.

4. The $3,000 annual limit on deducting net capital losses should be eliminated, since there is no per-year limit on taxing net capital gains. An infrequent trader needing to sell stock in a down market should not have to recognize $12,000 in realized tax-reducing net losses slowly over four years.

These proposals would require fairly minor amending of applicable laws; the changes would be more substantial philosophically than legislatively. And ideas like these for easing savers' burden by untangling how their financial activities and returns are taxed are not nearly as outlandish as a system that tells borrowers: heads you win, tails the suckers lose.

(Jaime Peters teaches finance at Maryville University. Joe Trefzger teaches finance at Illinois State University.)