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 Romney's IRA found its way, indirectly, into a broader set of
retirement policy reforms unveiled in President Obama's State of the
Union proposals on Tuesday.
The president proposed scaling back the tax deductibility of
mega-IRAs to help pay for other changes designed to bolster middle
class retirement security. I found plenty to like in the proposals,
with one big exception: the failure to endorse a bold plan to expand
Social Security.
Yes, that is just another idea with no chance in this Congress, but
Democrats should give it a strong embrace, especially in the wake of
the House's adoption of rules this month that could set the stage
for cuts in disability benefits.
The administration signaled its general opposition to the House
plan, but has not spelled out its own.
Instead, Obama listed proposals, starting with "auto-IRAs," whereby
employers with more than 10 employees who have no retirement plans
of their own would be required to automatically enroll their workers
in an IRA. Workers could opt out, but automatic features in 401(k)
plans already have shown this kind of behavioral nudge will be a
winner. The president also proposed tax credits to offset the
start-up costs for businesses.
The auto-IRA would be a more full version of the "myRA" accounts
already launched by the administration. Both are structured like
Roth IRAs, accepting post-tax contributions that accumulate toward
tax-free withdrawals in retirement. Both accounts take aim at a
critical problem - the lack of retirement savings among low-income
households.
The president wants to offset the costs of auto-IRAs by capping
contributions to 401(k)s and IRAs. The cap would be determined using
a formula tied to current interest rates; currently, it would kick
in when balances hit $3.4 million. If rates rose, the cap would be
somewhat lower - for example, $2.7 million if rates rose to
historical norms.
The argument here is that IRAs were never meant for such large
accumulations; the Government Accountability Office (GAO) looked
into mega-IRAs after the 2012 election, and reported back to
Congress that a small number of account holders had indeed amassed
very large balances, "likely by investing in assets unavailable to
most investors - initially valued very low and offering
disproportionately high potential investment returns if successful."
The report estimated that 37,000 Americans have IRAs with balances
ranging from $3 million to $5 million; fewer than 10,000 had
balances over $5 million.
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Finally, the White House proposed opening employer retirement plans
to more part-time workers. Currently, plan sponsors can exclude
employees working fewer than 1,000 hours per year, no matter how
long they have been with the company. The proposal would require
sponsors to open their plans to workers who have been with them for
at least 500 hours per year for three years.
These ideas might seem dead on arrival in the Republican-controlled
Congress. But the White House proposals add momentum to a growing
populist movement around the country to focus on middle class
retirement security.
As noted here last week, Illinois just became the first state to
implement an innovative automatic retirement savings plan similar to
the auto-IRA, and more than half the states are considering similar
ideas.
These savings programs are sensible ideas, but their impact will not
be huge. That is because the households they target lack the
resources to sock away enough money to generate accumulations that
can make a real difference at retirement.
Expanding Social Security offers a more sure, and efficient, path to
bolstering retirement security of lower-income households. If Obama
wants to go down in the history books as a strong supporter of the
middle class, he has got to start making the case for Social
Security expansion - and time is getting short.
(Corrects day in second paragraph to Tuesday from Monday)
(Editing by Beth Pinsker and Richard Chang)
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