This paper examines a public policy proposal designed to address the declining economic fortunes of the American middle class following the 2007 recession. The proposal calls for a $2,500 annual federal subsidy—delivered as Treasury Inflation Protected Securities—into Roth IRA accounts for individuals earning under $120,000 and married couples earning under $176,000. Drawing on the institutional model of public policy, the paper analyzes political feasibility, funding mechanisms (specifically redirecting corporate subsidies), and policy effectiveness using a four-part criterion model covering economic, equity, technical, and political dimensions. The paper concludes that the modified Roth IRA approach offers a practical, bipartisan-accessible remedy for middle-class retirement insecurity.
The recent financial crisis has highlighted the demise of the middle class in terms of earning power, savings, retirement security, and cost of living. The once-vaunted middle class of the 1960s earned 17.5% of total income; however, that figure has since fallen to just 14.6% of all income, while the top 5% captured a growing share—rising from 17% in the late 1960s to 22% today (Nutting, R., July 8, 2011). Perhaps even more disturbing is the loss of real wealth for middle-class Americans: a reduction of $7.38 trillion, primarily in housing value, according to the Federal Reserve, since the recession began in 2007 (Nutting, R., July 8, 2011).
Without a healthy middle class, the American economy has sputtered through an uneven, malaise-blanketed recovery. While public policy at the federal and state level is hamstrung by deficit and debt issues, the stark reality is that some measure of relief must be implemented for middle-class America if the overall economy is to gain momentum. To rectify, at least in part, this decline of middle-class America, a new policy proposal calls for subsidized retirement accounts for individuals earning under $120,000 per year and married couples earning under $176,000 (Your Roth IRA Guide.com, May 4, 2010).
This savings proposal identifies the critical importance of long-term saving for all earners across the economic spectrum. The intriguing aspect of the proposal is its targeting of subsidies for the individuals who most need assistance in growing their wealth over time but are constrained by earning power. In developing this policy, the proposal utilizes the existing Roth Individual Retirement Account model, but provides a $2,500 addition to the account annually from the federal government for individual earners under $120,000 and married couples under $176,000 (Your Roth IRA Guide.com, May 4, 2010).
Briefly, the Roth IRA allows individuals to save after-tax income in a designated account which, at retirement, can be tapped with no tax consequences on withdrawals. Several restrictions govern the Roth IRA, the first being an income limit. "Currently, it is $120,000 for individuals and $176,000 for couples. If you earn beyond those limits or your salary increases beyond those limits, you will no longer be able to contribute to a Roth" (Your Roth IRA Guide.com, May 4, 2010). Secondly, the annual contribution limit for the Roth is set at $5,000 (Your Roth IRA Guide.com, May 4, 2010).
Under the new proposal, the annual cap on contributions would be unlimited, allowing savers to dramatically increase the total dollars allocated for retirement. While the income caps would remain in place, the federal government would provide a $2,500 subsidy to the account on an annual basis. This subsidy would be delivered in the form of Treasury Inflation Protected Securities (TIPS). The advantages here are threefold: treasury debt would be held by domestic savers, government borrowing costs would be lower, and savers would hold a secure investment guaranteed by the full faith and credit of the U.S. government. The ultimate question is how this policy would fare in a political arena currently littered with considerable high-tension obstacles to action.
"Bipartisan pathways and corporate welfare funding solution"
"Economic, equity, technical, and political evaluation"
Crafting public policy is a mix of politics, economics, and social justice. No policy is perfect; however, one that combines aspects of utilitarianism—the greatest good for the greatest number—with sound economic fundamentals will provide the best recipe for successful implementation and positive outcomes. The middle class in America is the foundation of the economic engine. These individuals are the consumers, entrepreneurs, and hardworking drivers of the resilient U.S. economy.
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