The Looming Retirement Crisis

Are mandated retirement accounts the answer?

June 06, 2011
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Solutions require practical and political will

One would think that a nation as powerful and as rich as the U.S. should be able to craft and implement public policy that enables its citizens to retire comfortably, or at least with enough security to keep the wolves and vultures away from home and hearth. The reality is that solutions are available if we find the political and practical will to have an honest discussion about what needs to be done.

There are multiple starting points for that discussion. One is Teresa Ghilarducci’s proposal for guaranteed retirement accounts that she promoted in her 2008 book, “When I’m Sixty Four: The Plot Against Pensions and the Plan to Save Them.”

Ghilarducci was an economics professor at Notre Dame for 25 years. She currently is the director of the Schwartz Center for Economic Policy Analysis at New York City’s New School for Social Research.

Her book investigates the effect of pension losses on older Americans, and proposes a mixed system that includes Social Security and a new type of personal retirement savings account known as a Guaranteed Retirement Account. If adopted, she believes her proposal could guarantee workers 70% of their pre-retirement income once they have worked for 40 years.

Ghilarducci’s plan is radical. She opposes proposals to increase the retirement age for Social Security. Just because life spans have increased, she states, does not mean people live healthier lives.

She also questions the availability of good-paying jobs for older Americans who will be forced to compete with younger workers, especially when businesses may not adapt to a new employment dynamic and continue to prefer younger workers.

Under Ghilarducci’s plan, workers would be required to save 5% of their salary up to the Social Security earnings cap in a guaranteed retirement account. The accumulations in these accounts would be available after age 65. The government would guarantee the rate of return, and a government agency—not a commercial money manager—would administer the accounts.

You can almost hear the gasps of Libertarians and the large segment of the populace that prefers to shrink, not expand, the government’s role.

For guaranteed retirement accounts to become a reality there are significant cultural and philosophical barriers to surmount, as well as the type of heated rhetoric that accompanied attempts at health-care reform and mandates to buy insurance.

Ghilarducci would also eliminate the tax subsidies for 401ks, replacing them with a $600 refundable tax credit for each worker. This would help offset the financial sacrifice borne by workers setting aside the mandated 5%.

Ghilarducci rightly points out that the 401k tax subsidy is costly and simply doesn’t provide enough of a nudge to work. If it did, 401k balances would likely be much higher.

She admits the 401k is likely now a sacred cow, and proposes that existing contributions and earnings remain untaxed. But she is correct when she points out that rules enabling 401k participants to borrow funds, or collect them in a lump sum when leaving an employer, undermine their use as a retirement vehicle.

Next: Automatic IRAs

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