The Noah Project

Rebuilding a sustainable world.

Notional Savings Accounts

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I have to apologize for reposting whole articles today.  I’m too busy to condense them at this time, but do want to share some of the interesting ideas out there that I think my readers will enjoy.

Pascal-Emmanuel Gobry

Pascal Emmanuel Gobry

…Forced savings are a popular idea on the right, the center-left and among academic economists, and I’ve critiqued that notion. Basically, I find it hard to imagine under what circumstances forced savings wouldn’t be a brief for cronyism on a large scale. I’ve even criticized the general notion that “encouraging savings” is a valuable goal of public policy.

That being said, there is a valuable goal of public policy which I don’t think we talk about enough, and that is encouraging people at the bottom of the economic ladder to build assets. There is considerable attention (very laudably) lavished on the idea of helping people at the bottom get jobs and/or better jobs. But we always need to keep in mind the difference between stocks and flows. Getting a job gives you a flow of money and that’s great. But having assets gives you two very important things: greater economic security, and options.

Imagine someone who has a job and a family, and would like to strike out on their own. Because she does not have a nest egg, she is too afraid to make the leap. In this scenario, we all lose.

This meshes with Distributism, a school of economic thought I’m a student of, which says it’s desirable for the “means of production” to be spread among as many households as possible–neither by the state, as the Left often would, or by plutocrats, as the Right naively tolerates. Distributism goes of a piece with the Hayekian notion that because humans are not so good at processing information, decision-making should be as decentralized as possible.

In most Western countries, helping people build assets has been mainly encouraged through an industrial policy geared towards encouraging housing investment, with disastrous results. As I’ve said, I’m very ambivalent towards forced savings.

Where does that leave us?

One possibility I’ve thought about is the idea of notional savings accounts. The idea of notional savings accounts has been used by some countries as a way to reform their pensions system, as a compromise position between “defined benefit” and “defined contribution” schemes. From an individual person’s perspective, they have a savings account to which some part of their income as well as interest accrue, according to a set formula. But this is merely notional–in reality, the account is backed by the credit of the government. If you retire with $X on your notional savings account, it doesn’t mean that there is an actual savings account somewhere with that amount of money on it; it means that you are entitled to $X from the government for your retirement. This means that, e.g., people who reach the age of retirement at the bottom of a stock market crash aren’t screwed because their portfolio just lost 30%, even though they worked and saved just as much as those who (also by random chance) retired at the top of the market.

Ok, so now let’s apply the idea of notional savings accounts to every day life. If you’re in the bottom 50% of the income distribution, the state will either rebate from your taxes or just grant you, let’s say, 10% of your income on a notional savings account. This account will earn a set interest rate, every year, no matter what the market does (CPI+X, or whatever). Again, there’s no actual account, it’s a notional account. Let’s say you can withdraw money from the account whenever you like, but if you do so you incur a penalty, which gets lower and lower with each additional year you save.

This, it seems to me, achieves the goals of hayekian distributism, of helping people at the bottom of the ladder build assets, without running into the cronyism problems of financial savings accounts or pro-housing industrial policy.

One particular way in which I’d love to see notional savings accounts be implemented is through savings accounts for children. Let’s say we should decide that for each child (begotten to a married couple) the parents get $10,000 per year (or whatever) from when the child is born. Half of this is paid to the parents as a tax credit. Half of this is put on a notional savings account. It belongs to the child but she can only access it when she is 18. This is a spin on asset-based egalitarianism, and I’m pretty sure it would be wonderful. For one, it would take care of the ungodly mess of student loan subsidies–now any 18-year-old would be able to afford college (even if the account wouldn’t cover full tuition, it could be used as security for a student loan, which would therefore be of very low interest in a competitive marketplace). But mostly, it would be a tremendous societal breath of fresh air as every new 18-year old would have the means of their independence.

Author: Daniela

I was born in Croatia, at that time Yugoslavia. My family moved to the US when I was very young, but I still treasure the memories of my grandfather teaching me how to protect myself against the "evil eye," my grandmother shopping early every morning, at the open air market, to buy the freshest vegetables for the day's meals, and the traditions that were the underpinnings of our society. Someone once noted that "For all of us that want to move forward, there are a very few that want to keep the old methods of production, traditions and crafts alive." I am a fellow traveler with those who value the old traditions and folk wisdom. I believe the knowledge they possess can contribute significantly to our efforts to build a more sustainable world; one that values the individual over the corporation, conservation over growth and happiness over wealth.

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