America has a retirement savings system, but it is letting down millions of workers and families who aren’t wealthy. This is a very big problem that will affect everyone.
It’s also an opportunity for Congress to include all Americans in the benefits of our market economy.
Despite the existence of IRAs and 401(k) plans to encourage retirement savings, almost half of Americans have no net assets at all, and little or no retirement savings. Many of them have no money to save and no retirement account to put it in. Unfortunately, the tax benefits of the private retirement system are heavily concentrated among top earners. The failure to include lower-income earners is widening the wealth gap.
The Tax Policy Center estimates that in 2016, the average tax savings from all tax-qualified pension and direct contribution accounts was $1,040 per taxpayer. But averages can be misleading. Only 4.4 percent of workers in the lowest fifth of earners received any benefit, and their average tax savings was just $20. In contrast, 82 percent within the highest-paid quintile were better off, with an average tax benefit of $4,750. For the middle quintile of earners, about 48 percent received a benefit averaging $580.
How do we get lower earners to save? By creating a national retirement savings system and tax incentives for people off all incomes to save in it for retirement. This could improve economic security, help more people prepare for a self-sufficient old age, and facilitate saving for emergency expenses.
This type of inclusive capitalism would make every American worker an owner of assets generating income. And it could be funded through a relatively small sacrifice to high earners without increased federal spending.
A retirement savings system that includes all workers – particularly those with limited income — requires two basic elements: Funds to put in a long-term savings and investment account, and an account overseen by a fiduciary.
Recent interest in “auto-enrollment” in retirement plans is good, but it ignores that large part of the American workforce that has no available plan at work, where money can be invested free of fear from predation or neglect by the financial services industry.
Congress should start by setting up a national system of retirement savings accounts for everyone issued a Social Security number. These accounts would not replace but rather complement Social Security and most current private-sector retirement savings accounts.
The board that heads this system would have a fiduciary duty for managing the accounts, which would be particularly helpful to workers whose employers offer no retirement plan, and to low-wage workers excluded from today’s retirement savings system.
The federal government would make modest contributions to these accounts to complement workers’ contributions — optimally, the lower someone’s wage, the higher the contribution. Workers would be offered basic financial education and would have some latitude to choose from a basic menu of investment options similar to what federal employees have.
To accommodate the needs of low-wage workers, these accounts could be designed with some flexibility, to allow borrowing for emergencies, but most of the balance, including all government contributions, must be shielded from early withdrawals.
How do we pay for this? One idea is to limit the tax exemption that employees enjoy from contributions that their employers make to their 401(k) plans. Contributions of greater than $5,000, for example, might have a reduced tax advantage.
Revenues generated from this change could be used to fund an annual (say $500) tax credit placed in a retirement account for each worker. Accounts could be seeded with an initial contribution of $100 to $500 when people start working.
Another idea is to eliminate retirement tax breaks for the highest-income quintile. This would only increase their effective tax rate by 1.5 percentage points, according the Tax Policy Center. Or Congress could also find the money somewhere else, perhaps with a tiny tax on the value of Wall Street transactions.
Under this type of system, everyone would have retirement savings. Middle- to lower-income people would have more retirement security, some flexibility to meet emergency expenses, and greater ability to deal with the risk of living a long time or needing long-term care late in life.
Over 40 years, the automatic annual public contribution of a mere $500 may not seem like much. But this alone, without any worker contributions, would result in about $67,000 if invested at a five percent real rate of return. Annuitized, a sum like that could significantly increase the monthly income of someone dependent on Social Security — and just imagine if they contributed throughout their working life.
Any contributions added by workers or employers would add to these benefits. Because everyone would have a core account run by a fiduciary, everyone would have a place to add retirement savings and get advice about investment options.
Some states are moving to fill in the gaps in the retirement savings system, but they face opposition from entrenched interests, including the financial services industry and the threat of preemption under federal employee benefit law. That’s one of many reasons the system needs anchoring at the federal level.
Many of the United States’ trading partners offer models for near-universal savings and retirement systems. Under the Pensions Act of 2008, for example, The United Kingdom is setting up a system in which workers must opt-out of retirement savings plans, rather than opt in, and the National Employment Savings Trust (NEST) serves those who do not have an employer pension.
Australia’s “superannuation” system requires employers to contribute a percentage of employees’ income into diversified retirement funds managed by trustees. As long ago as 1999, that system covered 97 percent of Australia’s full-time employees and 76 percent of part-time employees. The system has since been improved and refined, and is helping workers accumulate capital.
A universal retirement savings system could help ease the disparity of wealth and economic security, both of which have emerged as major issues in the West. Absent Congressional action, the American retirement savings system is likely to continue leaving a good share of the population behind without adequate savings.
Karl Polzer is founder of the Center on Capital & Social Equity (www.inequalityink.org).
