Numerous studies—both past and current—report a looming shortfall of retirement savings for American workers who are approaching their retirement years. Some people call this a retirement savings “crisis,” whereas others characterize it as a serious retirement planning challenge.
Regardless of whether you call it a crisis or a challenge, there are steps we can take to improve Americans’ financial resources for retirement. To help with this goal, a recent report from the Stanford Center on Longevity (SCL) reviewed several studies of Americans’ retirement readiness. To cite just one example from the SCL report, the U.S. Government Accountability Office (GAO) recently reported that 48% of households whose head of household is age 55 and over have no retirement savings.
One of the problems with putting aside money for retirement is that only about half of all American workers are eligible to participate in a retirement savings plan at work. Many research studies cite the availability of such programs as crucial to building retirement savings.
The SCL report also describes, compares, and analyzes seven major proposals that represent significant policy shifts to help boost Americans’ retirement resources. These major policy proposals reflect three distinct ways to accomplish this goal:
- Expand retirement plan coverage to workers who currently don’t have access to savings plans at work. This solution encourages, but doesn’t mandate, retirement savings plans.
- Mandate minimum retirement contributions that must be made by both employers and workers.
- Deliver supplementary financial resources that don’t involve additional contributions from either employers or workers.
Each of these proposals has its pros and cons, costs, and barriers. Let’s take a look at each approach.
Encourage savings by broadening retirement plan coverage
Auto-IRA programs would make it easier for small employers to offer retirement savings programs to their workers, compared to setting up a 401(k) plan. With an Auto-IRA, employers would use their payroll systems to forward contributions made by their employees to specified financial institutions. In the process, employers would not otherwise be involved with the program and would incur no fiduciary liability, which is a common barrier cited by some employers for not offering such plans.
Auto-IRA programs would help workers save for retirement by putting their savings on auto-pilot and offering pre-selected investment options. These are both decisions that can intimidate new savers. By their very nature, Auto-IRA programs encourage savings by removing barriers for both the employer and worker.
The basic idea behind an Auto-IRA is to get people started with saving for retirement. It doesn’t include a feature to convert savings to retirement income, which is a difficult task for many pre-retirees. Such a feature could be added in the future.
The main authors of the Auto-IRA proposal are Mark Iwry of the Brookings Institution and former senior advisor to the U.S. Secretary of the Treasury, and David John of AARP.
Mandate minimum retirement contributions
The SCL report analyzed two proposals that would mandate minimum employer and employee contributions to authorized retirement programs.
A universal savings program, proposed by Andrew Biggs of the American Enterprise Institute, would require contributions of 1.5% of pay from both workers and their employers, and the program would operate much like current 401(k) plans. At retirement, participants could withdraw from their accounts or buy a monthly guaranteed lifetime annuity.
Guaranteed Retirement Accounts (GRA), proposed by Teresa Ghilarducci of The New School and Tony James of The Blackstone Group, would also mandate contributions of 1.5% of pay from both workers and their employers. Funds would accumulate in investment accounts that would be invested significantly in stocks for growth potential. The program would guarantee that a participant’s account wouldn’t experience a net cumulative loss over the period of their participation in the plan. Upon retirement, at least 75% of the mandated accounts would be converted to monthly guaranteed lifetime annuities.
A tax credit of up to $600 would help make the GRA program revenue-neutral for many workers. To pay for the cost of the program, the proposal would reduce or eliminate the current tax preferences enjoyed by IRAs and 401(k) plans, a move that’s likely to encounter resistance from both employers and financial institutions that favor these programs.
A creative proposal
The T.R.U.S.T. Fund for America proposal would involve investing $7,500 in an account for every baby born after a specified date in the future. The money in these accounts would be invested in low-cost pooled funds similar to the Thrift Savings Plan currently offered to federal employees. The accounts would be invested significantly in stocks until the account holder reaches age 70. At that time, the accounts would be converted to a stream of retirement income, according to terms developed by an independent federal agency that would oversee the program. No contributions would be required of workers or employers.
To pay for the contributions, the U.S. Treasury Department would issue EE 30- year Savings Bonds. After 30 years, the accounts would redeem the bonds for their face value. Funds remaining in each individual’s account would continue to grow in value until the individual reaches age 70. The idea capitalizes on the extremely long investing horizon—from birth to age 70—and the ability of the U.S. government to borrow at favorable terms.
This author of this proposal is Ric Edelman, the founder of Edelman Financial Engines.
The policymakers’ dilemma
Policymakers who aim to improve Americans’ retirement resources face basic dilemmas with each proposal:
- Voluntary programs like the Auto-IRA appeal to people who object to mandated government programs. The push-back to the Affordable Care Act demonstrated that many Americans don’t like mandates. However, because of the voluntary nature of an Auto-IRA, some workers will opt out or decide not to contribute. As a result, they might still fall short with their retirement savings.
- Mandated programs like universal savings accounts and Guaranteed Retirement Accounts could go a long way to eliminating poverty in retirement, when combined with Social Security benefits. However, as noted previously, many Americans don’t approve of mandated programs. The proposal for Guaranteed Retirement Accounts is also likely to encounter resistance by eliminating tax preferences for IRAs and 401(k) plans.
- The T.R.U.S.T. Fund for America proposal bypasses the debate of encouraging vs. mandating retirement contributions. But it doesn’t help people who are currently alive, so other solutions would be needed for these millions of people. The program also adds to the U.S.’s borrowing costs, which could be viewed as marginal in the scope of other governmental borrowing.
The hard reality is that adding broadly to Americans’ retirement savings will cost somebody some money—workers, their employers, or the U.S. government. We will need to decide collectively if this cost is a priority for the U.S. compared to other societal challenges we face. If it is, the next step is to determine the method that will work best for American workers. The setback in Americans’ retirement readiness caused by the COVID-19 pandemic only adds to the urgency of this challenge.
A useful first step could be to convene a group of stakeholders to form a consensus on the urgency of the retirement savings challenges and the direction of viable and politically acceptable solutions. Seeing what’s at stake, this seems like a reasonable and smart step.
Disclosure: I am one of the co-authors of the Stanford Center on Longevity study that’s discussed in this post.