Professor Teresa Ghilarducci on a major piece missing from the finance Reform Bill: reinventing the 401(k).
In a perfect world, an average worker could amass something like $400,000 in a 401(k) by retirement. After nearly three decades of 401(k) contributions, though, the average account balance for people nearing retirement age is about $60,000, far less than what’s needed. So it’s no surprise that when a recent Gallup poll asked what Americans want most from government, more chose guaranteed pensions than guaranteed jobs or health care.
Most people save less than 5 percent of their income for retirement, and many start withdrawing funds early because of layoffs, divorces, and other unexpected events. The consequence of these 401(k) leaks is that workers retiring in 15 years will do worse than their parents and grandparents, according to the Center for Retirement Research at Boston College. Almost two-thirds of households will probably face declining living standards in retirement.
401(k)s may be failing most folks, but they’ve been a great subsidy for folks with higher incomes:
All the tax-free contributions going into 401(k)s, Keoghs, and other retirement schemes reduce federal tax receipts by $193 billion a year. And almost 80 percent of the tax breaks go to the top 20 percent of taxpayers.
Her solution: create a “government-guaranteed alternative consisting of diverse and prudent assets such as blue-chip stocks and corporate and Treasury bonds.”
let’s scale back the tax breaks. Instead, we can use the money to help everyone sock away 5 percent of their pay in safe retirement accounts that would serve as a universal supplement to Social Security. People could keep their employer plan if it met more stringent standards such as a contribution rate of at least 5 percent, a ban on early withdrawals, and conversion into an annuity at retirement. Anyone without an employer plan would automatically be enrolled in a Guaranteed Retirement Account to which employees and employers would each contribute 2.5 percent. The government would then provide everyone a modest tax credit to offset the employee contributions. The return would be guaranteed by the government at about 3 percent above the rate of inflation–or close to the real growth rate in gross domestic product.
The key to this proposal is pooling individual accounts. These would be professionally managed, but with trillions of dollars in the pools, management fees would be lower than on conventional retirement accounts. That means every dollar in tax breaks would translate into almost a dollar in retirement income instead of going toward fees or being diverted to other purposes by people who make withdrawals before retirement. National savings would get a boost. All Americans, including the 64 million who have no pension plan, would get one at no extra cost. What’s not to like?
I’d add one more thing to the mix — an option to put your retirement money into a plan that used the same investment strategy as the main plan but whose investment managers use the stock to push companies to act in a long-term, socially responsible way. That way, you wouldn’t have to worry that your retirement money would be used to push your company to, say, fire your ass when you hit 50 or would encourage Wall Street to push for another round of the deregulation that created the financial meltdown. Overall, though, a very smart idea.
