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A Great (and Impossible) Plan to Fix Retirement

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A lot of policy dilemmas could be fixed easily enough, if only you got past the politics. Talking to Teresa Ghilarducci, an economist and adviser to Hillary Clinton’s presidential campaign, you get the impression that the retirement crisis isn’t one of them.

The rapid decline of traditional, defined-benefit pensions has left many Americans unprepared to stop working. Median retirement savings for people age 55 to 64 were $14,500 in 2013, despite the odds that they’ll live to 85; as many as half of those households have no retirement savings at all. Social Security alone isn’t enough: The average monthly payment is just $1,328. Unless something changes, a big chunk of the population is sliding toward not-so-golden years.

Ghilarducci, a professor at the New School who studies retirement, has for years pushed an eminently reasonably plan for tackling the problem: Figure out what’s needed, and work backward from there. By her estimate, the average worker has to save 17 percent to 20 percent of their salary each year to maintain their standard of living in retirement. Subtract the 12.4 percent saved through Social Security, and you’re left with a hole of at least 5 percent.

To fill it, Ghilarducci would require people to save an extra 5 percent of their income in government-run Guaranteed Retirement Accounts. Half the money would come out of workers’ paychecks (offset by a refundable $600 tax credit), and the other half from employers, just like Social Security. Volume would keep investment-management costs low; the target return would be at least 3 percent a year.

The idea deserves attention, and not just because Ghilarducci’s role with the campaign suggests Clinton could push something along the same lines if she becomes president. Just as important, what she’s advocating illustrates the depressing difficulty of fixing retirement policy: For all the obstacles her plan presents, it’s hard to think of anything better.

Splitting that 5 percent equally between workers and employers seems intuitive. But forcing workers to make even a small additional contribution to their retirement is hard. The reason people don’t save enough isn’t just that we’re bad at anticipating future needs; it’s also that stagnant wages, coupled with the rising cost of housing, health insurance and education, have squeezed the amount they’re able to put away.

Ghilarducci addresses that with the $600 tax credit, which would cover the entire contribution for somebody making the minimum wage, and reduce the average worker’s effective pay cut to a little less than 1 percent. But that’s still a big cut relative to recent gains in pay: After adjusting for inflation, average wages last year were no higher than in 1979.

Could the government just offer a bigger tax credit? Not without raising taxes or adding to the deficit. Ghilarducci says $600 is how much the government can afford by ending the tax subsidies for 401(k) accounts. That’s clearly a tall order; think of the pushback when President Barack Obama proposed phasing out 529 college-savings accounts, a much smaller program, which caused him to drop the idea.

An even bigger obstacle is forcing employers to help fund these new accounts. Total wages and salaries in the U.S. last year were about $7.5 trillion; if every employer had to contribute 2.5 percent of pay to new retirement accounts, it would equal a tax of almost $200 billion. (Companies that already contribute that much or more to retirement plans would be exempt.)

Ghilarducci acknowledges the trickiness of that. “That’s the most negotiable part of the proposal,” she said. “I really don’t care who contributes. We need to get 5 percent of pay into a retirement package.” Except that, the more that workers need to contribute themselves, the more it will hurt.

Here’s another catch: Forget about letting people opt out. Other advocates of auto-enrollment retirement funds, not least Obama, have relied on the magic of behavioral economics: Most people won’t bother pulling out of the program, so giving them the option eases the psychological sting without significantly undercutting the policy goal.

Ghilarducci argues that’s wrong: Although inertia keeps most people enrolled initially, over time enough people will pull out to defeat the purpose of the policy. “People lose their jobs, lose hours, get a divorce,” she said. “As life events intercede, fear and shock overcome their inertia.” So Ghilarducci insists that her plan only works if the new retirement accounts aren’t just universal, but mandatory. And unlike 401(k) accounts, there’s no way to take the money out early.

As if that weren’t hard enough, Ghilarducci volunteers that her plan won’t be enough to help people who are already in their 40s or 50s; for them, the answer is to delay collecting Social Security benefits a few years, increasing their payments. So if you’re a politician looking for an upside to this plan, meeting the needs of those nearing retirement isn’t it.

Getting lawmakers to simultaneously end the tax advantage for existing retirement plans, cut workers’ paychecks and impose a huge new tax on employers, without solving the problem for those who need it most, may seem quixotic. But the beauty of Ghilarducci’s plan is that it pushes policy makers to confront the question: If not this, then what? What’s a better way to close the savings gap?

The easiest answer to that question is obviously to keep ignoring it. Yet despite being frank about the pitfalls, Ghilarducci says she’s optimistic that some of these changes will happen soon. “A lot of boomers forestalled their own problems by working longer,” she said. But as the first wave of boomers reach their late 60s and early 70s, that solution stops being viable. Most people can’t work forever, whatever they tell themselves.

If Ghilarducci is right, then a problem that few presidential candidates are treating seriously is about to get a lot harder to dismiss. The best answer could well be the one she’s proposing. But it’s hard to imagine anyone being happy about it.


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