Senator Brown helps a small group of workers protect their pensions. Now is time for pensions for all American workers.
UNITED STATES – OCTOBER 16: Sen. Sherrod Brown, D-Ohio, speaks to a member of the United Mine … [+]
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Some states are mandating employers require employees to save for retirement. According to an upbeat New York Times
NYT
The program is as close to mandatory savings as you can get because the worker saves into their own account without deciding to, but it is not completely mandatory because the worker can withdraw the funds whenever they want. They are not retirement accounts. The “R” in IRA should be dropped.
Small business reportedly like these state automatic IRAs because they eliminate the bureaucratic hassle and the prisoners dilemma caused by many small employers wanting to provide a plan but scared to if their competitors were not. Employers want an easy plan to offer their employers but employers, crucially, do not want to pay a cent.
Flaws in the State Savings Plans
These flawed state plans are well-intentioned but may likely be subpar solutions to a national problem we can’t solve with 50 or less individual and different state plans.
Obama tried to help workers. The MyRA plan was short-lived, the Trump administration summarily dismissed the plan in 2017. MyRAs were government bond accounts designed as “starter” retirement accounts for people without retirement savings and who do have access to an employer plan. The income-eligibility requirements were the same as for Roth IRAs-an annual income in 2015 of less than $131,000 a year for individuals. Employers were spared a “regulatory burden”, workers, rather than the employer sets up the account.
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Some of the economists’, John A. Turner and Bruce Klein, arguments against the MyRA apply to the new state accounts. The state accounts, like the MYRA are voluntary liquid accounts and were doomed to be suitable retirement vehicles for most low and middle range workers. The MYRA and Automatic State IRAs are one of many proposed in decades of government policies, see the SECURE Act, is that roughly half of the private sector workforce is not covered by a pension. The policy assumption that the pension coverage problem is a supply-side problem is wrong. It is not workers facing impediments that prevent them from having the pension coverage they would like. Based on the experience with numerous innovations to individual retirement accounts (IRAs) in the past, nonparticipation in 401 (k) plans, nonparticipation in similar plans in other countries and economic theory about savings and low wages, even with automatic enrollment low and middle income workers will likely not contribute or withdraw their money before retirement. Research shows, workers need to be automatically enrolled into plans that provide employer or government matches.
State Plans May Create More Financial Predation
COVID-19 has made many things worse, one crises is now under the radar and that is an explosion of financial fraud which had already been rising before COVID-19. According to Atlas VPN, financial fraud complaints in the US jumped by over 104% in the first part of 2020 compared to the first three months in 2019. And the SEC found two weeks ago that “Fraudsters use times of uncertainty and change, such as the current COVID-19 pandemic,” to lure victims into investment scams, fake CD scams, and bogus stock promotions.
A feared unintended consequence of the State plans may be exposing unsophisticated investors to fraud when their IRA modest lump sums are transferred to commercial accounts promising the moon. A national plan that required people keep their money in until retirement– like a defined benefit plan or Social Security would reduce fraud.
Ireland Personal Accounts Shows Voluntary Doesn’t Work
The international experience with plans like the State IRAs is Ireland which mandated voluntary personal retirement savings accounts (PRSAs) since 2003. Employers are mandated to provide individual account pension plans administratively, but there are no employer contributions and workers voluntarily participate in them. Decades after the mandate took effect, 81% of the employers with plans had no one contributing to them. The main market for the State IRAS has been the highly-paid self-employed rather than employees who were not offered an employer-provided pension.
A Retirement Fix We Can Do Now
We need a system with the best pension practices that correct major weaknesses in the current system: #1: The current 401(k) etc. system is voluntary and leaves big gaps in who is covered— over half of Americans are without an employer-sponsored plan. The system relies on persistent voluntary savings but Betterment found a third of millennials dip into their retirement funds early losing out on compound interest —(save $125 per month at age 25 and you get nearly $900,000 at age 65; wait until age 45 and you have less than $150,000.) The second weakness is that the system leaves workers to bear the full brunt of market risk and the full brunt of making financial decisions.
Fortunately, the Federal Government’s Thrift Savings Plan for their own employees can be a basis for a national solution. The most comprehensive version of what a national retirement plan could be is described by my co-author Tony James and I in our book.
Key features of A Good National Retirement Plan
A good plan has an employer or government match. Peter Buttigieg when running for president had, along with Biden, the most comprehensive retirement plans – see the excellent new report from Karen E. Smith Richard W. Johnson and Melissa M. Favreault from the Urban Institute. Buttigieg was on the right track, he required a 3% employer contribution. Tony James and I argued the COVID-19 pandemic demands swift action for a plan that mandates 3% shared equally by the worker and employer. It bears repeating that the state plans don’t have a match at all it is just workers’ money and thus doomed to substantially fail without the match.
A good plan has low expense ratios since they promise higher expected returns. The federal government TSP plan, because of their enormous scale, can keep administrative costs exceptionally low, with the latest estimate for expenses only 0.042 percent. Commercial plans typically charge up to 15 times that.
A good plan has autoenrollment, the best plans have mandatory participation. The voluntary state plans will likely be highly effective at stimulating plan participation. But low and middle income workers are more likely to drop out even though they are more likely to have their participation boosted the most. I am usually in the glass-half-full camp, but on this matter Bill Gale and David John at Brookings are the half-full guys. They praise the state plans for boosting participation, I want to solve the problem of unequal and inadequate savings in one easy stop.
Savings Reform For 2021
The hope is that the Biden-Harris Administration will go bolder than the state plans and take lessons from the failures of the current system and the successes of scattered plans in the U.S.. If Biden-Harris resurrect the MyRA they should market it for what it is – a predator – free savings plan that sits on top of the Social Security system managed by professionals. An automatic IRA plan and MYRA plan are NOT retirement plans.
The hope is that the Biden-Harris Administration will build bridges with a bold national retirement plan. Both the right and the left share the ambition that families have a way to save for a rainy day, avoid unproductive and unmanageable debt and secure their old age.
The hope is that the Biden-Harris Administration help construct a compromise universal pension plan that could help solve the problem that government policies have helped put too much wealth in some places and not enough in the right places. According to authors at the Federal Reserve the bottom 50 percentiles of wealth have only 1.9 percent of total wealth, while the top ten percentiles have 69 percent. Workers need about 5 – 15 times their lifetime income at retirement but only the top of the top have enough according to my research with coauthors Anthony Webb and Siavash Radpour.
Republicans and Democrats can take heart that Americans want to be forced to save for retirement. The latest survey shows over half of those surveyed—53%—said “it is the government’s responsibility to provide universal access to a retirement savings plans.” And 54% “believe personal retirement plan contributions should be mandatory.” Three-quarters of these workers want government to force employers to provide pensions.
The COVID-19 recession lays bare the fatal flaws at the heart of the U.S. retirement system. Almost all low and moderate earners have no significant retirement savings, and even high-income workers risk relying only on Social Security. Individual workers are asked to save voluntarily for retirement in a fund that can be drained at any time. No other worker in a rich nation relies on a voluntary liquid, individually-directed retirement system. Now is the time for policy makers to reform this failed system by creating trusted, well-designed vehicles that engages all American workers to save for retirement. We can build on Social Security through the proven Thrift Savings Plan (TSP), now a retirement savings plan for only federal government employees. Expanding TSP creates a TSP-for-All,” Guaranteed Retirement Savings retirement savings plan that is comprehensive, user-friendly, revenue neutral retirement savings plan for all Americans in the labor force.