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 But a mandatory retirement savings program might just have a shot at
success in Washington as part of a broader bipartisan attempt to
address the looming retirement security crisis. The idea is getting
a push from a politically unlikely duo: labor economist Teresa
Ghilarducci and Tony James, president of Blackstone Group LP, the
global asset management firm.
What they have in common is a mutual belief that the 401(k) system
is not up to the job of building a secure retirement for average
Americans. Indeed, just 23 percent of workers age 45 and higher have
saved more than $250,000, according to the Employee Benefit Research
Institute. Meanwhile, Social Security replaces only about 40 percent
of pre-retirement income on average, according to the Center for
Retirement Research at Boston College - far short of the 70 to 80
percent most households will need to retire with security.
“People are coming into old age without sufficient money to maintain
their lifestyles, and many of them will be poor or near poor when
they were once middle class,” Ghilarducci says.
HOW IT WOULD WORK
Ghilarducci has long advocated replacing 401(k)s with a federally
managed retirement savings plan called Guaranteed Retirement
Accounts (GRAs), and now she has teamed up with James to push the
idea. The two recently published a white paper outlining a joint
version of Ghilarducci’s GRA idea. Ghilarducci also is serving on a
commission on retirement security and personal saving organized by
the Bipartisan Policy Center (BPC), which will report its findings
in May - and is expected to reflect at least some features of the
GRA.
The 401(k), a tax-deferred workplace-based vehicle for saving and
investing for retirement, requires individuals to make their own
investment decisions. Some 401(k) plans have high fees - and they
are not designed to provide a guaranteed lifelong income stream.
Ghilarducci and James propose that every worker would own and
control a GRA account, initially contributing 1.5 percent of income,
which would be matched by employers. Their plan calls for a
mandatory system with universal participation, but it would be
cost-neutral for workers below median income level (a family earning
$45,000), because it would be offset by a tax credit.
Account holders would choose from a list of professional money
managers competing for their business in a federally run exchange.
The aim is to let managers compete for business based on returns and
their ability to keep costs down. At retirement, savings would be
converted automatically to an annuity that guarantees a yearly
payout for life. This would be accomplished through a nationwide
retirement pool that shares actuarial risk and administered by the
Social Security Administration.
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Ghilarducci and James are not the first to propose a mandatory
retirement saving system. The Obama administration has long promoted
auto-IRAs, which would be offered to all workers who do not already
have a 401(k). It took a step in that direction last year with the
introduction of the MyRa, a federally sponsored voluntary starter
retirement account featuring payroll deduction, no fees,
conservative investments and a guaranteed rate of return. And a
number of states are pushing to create their own mandatory plans.
Ghilarducci and James also point to the experience of other major
industrialized countries - Britain, Australia and New Zealand among
them - that have moved to universal, mandatory savings plans.
LOOMING DEBATE OVER SOCIAL SECURITY
Despite the political toxicity of mandates, their plan could gain
traction as part of a bigger legislative deal focused on both
retirement saving and Social Security reforms.
Congress will have to address Social Security sometime soon. The
program's two key trust funds - for retirement and disability
programs - are on track to be exhausted in 2034, according to the
Social Security trustees, absent an injection of new revenue,
benefit cuts or some combination of the two.
Progressives hope not only to restore the trust fund's health, but
to expand Social Security benefits as part of the reform debate.
They hope to inject new revenue into the system by lifting or
eliminating the cap on wages subject to the payroll tax and
gradually increasing payroll tax rates. Conservatives will push for
savings via higher retirement ages and possibly means-testing of
benefits.
The BPC report will provide a useful proxy on how the debate could
shape up in Congress.
The commission will reflect at least some of the Ghilarducci-James
approach, focusing on improved access to workplace retirement
accounts, plan design and automatic enrollment. The Social Security
recommendations are likely to include higher revenue and benefit
improvements for widows, spouses and low-income beneficiaries. But
higher retirement ages also have been part of the group’s debate,
according to Shai Akabas, BPC’s associate director of economic
policy.
“Many groups have looked at Social Security or 401(k)s or tax
preferences,” he says. “We are looking at how the pieces interact as
a system.”
(Editing by Matthew Lewis)
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