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.