Is This the Solution to America's Retirement Crisis?
A provocative economics professor wants to overhaul the 401(k) system with Guaranteed Retirement Accounts
Richard Eisenberg is the senior Web editor of the Money & Security and Work & Purpose channels of Next Avenue. Follow Richard on Twitter @richeis315.
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Once dubbed "The Most Dangerous Woman in America" by U.S. News & World Report for her call to overhaul the nation's employer-sponsored 401(k) retirement plan system, Ghilarducci made a convincing case in the Times why so many people face "the specter of downward mobility in retirement."
She noted that 75 percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. (Other analysts challenge that figure, but the public's fear about their retirement prospects is undeniable.)
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Blame for the Retirement Crisis
Ghilarducci places the blame for the retirement savings crisis squarely on employers, who have increasingly replaced their guaranteed pension plans with voluntary — some say iffy — 401(k)s, now owned by 60 million Americans. (Only about half of American workers are even offered such retirement plans.)
The 401(k) plans, of course, make workers responsible for investing and managing the accounts to secure their retirements. In most cases, investing in the plans is optional; roughly a fifth of people eligible for a 401(k) don't sign up.
Investment returns aren't guaranteed; they reflect the performance of the markets and the investments employees choose. When the stock market tumbles, as it did in 2008, many 401(k) accounts get whacked. Americans lost more than $1 trillion in their 401(k)s in 2008, according to Ghilarducci.
"Basing a system on people's voluntarily saving for 40 years and evaluating the relevant information for sound investment choices is like asking the family pet to dance on two legs," she wrote. (Her views echo those of Alicia H. Munnell, director of the Center for Retirement Research at Boston College, in her Next Avenue article: "Are Americans Really Able to Manage Their 401(k) Plans?")
Guaranteed Retirement Accounts Explained
What really caught my eye in Ghilarducci's piece, however, was the solution she proposes: Guaranteed Retirement Accounts, which would be provided by employers and would supplement retirees' Social Security checks. The White House Middle Class Task Force in 2010 called the proposal a "viable option to help American families save for retirement."
Are mandatory Guaranteed Retirement Accounts an idea whose time has come?
Here's how they'd work:
- You would be required to contribute 2.5 percent of your annual income (after the U.S. government kicks in the first $600 through a refundable tax credit).
- Your employer also would be required to contribute an amount equal to 2.5 percent of your income.
- You and your employer could make additional, voluntary contributions.
- The money in the accounts would be pooled by the Social Security Administration and professionally managed, invested in stocks and bonds.
- You'd be guaranteed by the government a 3 percent return above inflation (that would equal 4.7 percent today); if actual investment returns were consistently higher, participants would get the extra money.
- When you retire, you'd receive an annuity with monthly checks for the rest of your life that would rise with inflation.
Others have suggested similar ideas.
(MORE: The Security of Future Retirement Benefits)
There's the Automatic IRA proposed by the conservative Heritage Foundation and the moderate Brookings Institution and backed by President Obama, where businesses without retirement plans would be required to invest a portion of employees' paychecks in IRAs unless the employees opted out. The Universal 401(k) Plan, from the New America Foundation think tank, would also have an opt-in system, though employer contributions wouldn't be required.
What the Critics Say
Some retirement analysts, however, give a thumbs-down to Guaranteed Retirement Accounts and Ghilarducci's justification of them.
David Wray, president of the Plan Sponsor Council of America, the trade group for employers' retirement plans, calls the accounts "an additional 5 percent payroll tax." Since "virtually all retirees are currently provided a retirement income stream by Social Security, there is no need for another mandatory government program," he says.
Olivia S. Mitchell, executive director of the Pension Research Council at The Wharton School of the University of Pennsylvania, says Ghilarducci should have more faith in Americans' ability to make sensible economic choices regarding their well-being. "Americans have set aside more retirement money and hold better diversified portfolios than people in most other countries," she says.
Nevin Adams, co-director of the Employee Benefit Research Institute's Center for Research on Retirement Income, also takes issue with Ghilarducci's dire figures about the public's retirement savings. He believes the current system could be improved, but asks "whether the Congress and the nation will be willing — and able — to pay the price of an expanded or new retirement savings mandate."
Politics and Retirement Savings
Appearing on the Ideas in Action With Jim Glassman public television show recently, Ghilarducci seemed optimistic that Washington would seriously consider ways to improve the 401(k) system. "There's a lot of interest in doing something about retirement insecurity," she said.
Maybe. But given the political fireworks over the Affordable Care Act's insurance mandate, I'm confident that Washington isn't in the mood to ramp up a new mandated program. As Robert Teitelman, editor-in-chief of The Deal magazine, wrote on the Huffington Post Business site: "The politics of this are very difficult."
Even so, Ghilarducci deserves credit for putting the topic of retirement savings on the national agenda.
It's about time.