Millions Of Americans Can't Save For Retirement. These Economists Have A Plan To Change That
A pair of economists from either side of the aisle have a plan to help the millions of low income Americans who can’t save for retirement. We talk about it.
Teresa Ghilarducci, professor of economics at the New School for Social Research, and Kevin Hassett, vice president of the Lindsey Group and a distinguished visiting fellow at the Hoover Institution. Co-authors of a new proposal from the Economic Innovation Group that is aimed at building retirement savings for the bottom 50% of American workers.
On driving factors for retirement insecurity
Kevin Hassett: “Policymakers have recognized for a long time that saving for retirement is an important objective for everybody. But they’ve adopted policies that pretty much only give an incentive to do that, a tax incentive, if you’re really rich. And the reason is that what you can do is you can shelter your income from taxes this year by putting your money in an IRA. But that benefit basically depends on how much tax you save if you put the money in the IRA.
“And because we have a progressive tax system, which means you tax people at the top more than people in the middle and the bottom, then basically we have really generous subsidies for saving for retirement for rich people. But nothing at all really for people, especially the bottom half of the income distribution, to pay almost no income tax. And so really, it’s the people at the bottom that are most urgently in need of help saving. And it’s the people at the top who get the benefit of all the policies that currently exist.”
Teresa Ghilarducci: “I’ve spent my life … looking at the way we accumulate wealth in this country. … The reason why we accumulate it is for this retirement savings. And we’ve had a 40 year experiment with the do-it-yourself voluntary system of your employer voluntarily putting you into a retirement plan — it’s 401k’s usually, or you yourself putting money away for the IRA. And after 40 years, it’s a failed experiment. This voluntary, do-it-yourself, all the risk is on the individual, has just shown its true colors that life happens.
“… When you are dependent upon your health and your ability to sell yourself to an employer, you can’t always plan your way around your whole life course. And so we do need to follow the example of other parts of our labor market. Where there is an automatic pension saved for you, put aside for you. Or in other countries where they don’t leave it up to a voluntary kind of commercial system. And one of those pockets … is the federal employees. They have such a system, people in the auto industry, et cetera.”
What is the Thrift Savings Plan for federal employees?
Teresa Ghilarducci: “If you’re a federal employee, and as Republicans and Democrats cycled in and out of the White House, they learn about it. It’s a pension plan for federal employees. It’s real simple. I have a similar one as a college professor called TIAA-CREF. But what you do is that you are automatically enrolled into a retirement account. The employer in this case, that employer is the federal government, contributes a bit. You contribute. And you have choices of very low fee, very well curated retirement funds. And you get a lot of advice about how to invest. Most don’t choose. So you’re automatically put into one that’s appropriate to your age in terms of risk and reward profile.
“And you go about your business, you just don’t worry about it. The money flows in every month and it accumulates and it’s invested professionally for you. And when you retire, it’s there to supplement your Social Security. What’s really great about that is that we have a workforce, the federal workforce, that doesn’t fret about whether or not they have enough or where it’s invested. They go about doing the nation’s business, or if you’re working at a university or you’re working at a car plant, you go about and do your job. And you’re not trying to beat the market or play investor or worry, worry, worry or worse.
“Worse … and we talked about this, you feel ashamed that somehow you’re doing something wrong. And so what the Thrift Savings Plan does, or any automatic pension plan at work, is it takes the shame out of preparing for retirement. It’s easy. It’s professional, and you’re not getting ripped off. Because you know that a bigger organization is looking after you and clearing your way through the predators who want your money, and investing it wisely. One of the best things about it is that it’s paid out as an annuity. So the people that we just met on your show don’t have to worry about running out when they’re in their 70s or 80s.”
What are you specifically proposing with your retirement savings plan?
Teresa Ghilarducci: “We come from very different perspectives on the economy. But we came together here as economists, looking at the same data. And I can’t tell who’s speaking — him or me, in terms of how important this is and what a good idea our idea is. So our idea is that everyone have access to the Thrift Savings Plan and we are just proposing this framework to Congress. They’ll work out the details about who everybody is. But for right now, Kevin and I have modeled what this program would mean for people below the median, people who are low income, low-middle income, who don’t get any benefit from the federal help now because of the tax deduction.
“So we are proposing that everyone get access to the TSP architecture, that they’re automatically enrolled at work into their account, and that the government matches their contribution. Whether or not the government contribution comes first or the employee contribution comes second, we have to worry about low income workers not having enough money to save. So perhaps their earned income tax credit can be deposited or an increase in the federal minimum wage.
“Those details don’t really matter for the big picture. But what matters is that workers will be automatically enrolled in a TSP plan. And if they move from job to job, that account goes with them. They are de-linked from the employer, whether or not the employer wants this. The employer to pay their portion if they wanted to. But it’s not up to the poor employer to have to decide or sift through all that. So it basically opens up for all Americans what federal and military workers have now.”
Kevin Hassett: “Let’s think about a person who is making $30,000 a year. And, you know, in the current Thrift Savings Plan, you can contribute up to 5% of your income into your retirement account and the government matches. And so 5% of $30,000 is $1,500. And so you could put $1,500 into a retirement account this year and then the government will match that. Which basically, in some sense, you could say takes your income $1,500 above $30,000 because you’re getting that income from the government. But then it goes into a retirement account and then it starts to compound, markets go up and it’ll get bigger and bigger over time.
“And Teresa and I have run the numbers and basically a person right now, a relatively low income person who’s just starting out in their career by the time they retire, would be looking at a retirement account that’s about 10 times bigger than the account that … was talked about in your introductory segment, the above $600,000. Einstein called compounding the most powerful force of the universe. So the mystery of compounding, and sort of steady contribution and government matching, that we can fundamentally alter the distribution of who owns what in our society.
“And I think that people who are traditionally big fans of Teresa’s work, and I’m always a fan of Theresa’s work, even when I disagree with it. But they’re going to be really happy about it because they recognize that this is a way to help people at the bottom. It’s not a welfare program, but it’s a way to take government money and throw it at people at the bottom. But people on the right should recognize that what this does is that it connects people to society in a way that they’re not right now. … And if you have very widespread ownership, then you might have a much more stable society.”
On bipartisan support for a universal retirement savings plan
Teresa Ghilarducci: “It doesn’t matter what political party they are, they all want some kind of security. They want a safe place to save their money for their retirement, to supplement Social Security, wide support for Social Security, both by Republicans who are just real people, real Republicans and real Democrats who are just workers. They love Social Security. And I think it’s taken 30 years for the politicians to sort of get it. You know, that is about supplementing Social Security.
“And I am the most hopeful I have been for 30 years that something will happen. We also have mayors and governors who say my state can’t afford a wave of poor elders in my state, or in my city. Because they’re the first line to defense, providing emergency aid, providing the shelters there. We saw a movie called Nomadland. It was based on a journalistic report on what happened to elders in that last recession.
“We could have tens of millions of elders who are middle-class workers falling into poverty. So the alarm about needing a plan to supplement Social Security is upon us. It feels a little bit like climate change, like finally everybody is getting it. That this is a slow moving problem that’s now getting fast moving. The only pushback that we have been getting for the last two weeks are from the private 401k industry. They may be threatened.”
From The Reading List
Washington Post: “Opinion: Everyone should have the retirement plan federal employees enjoy” — “The Federal Reserve reports that Americans in the bottom 25 percent of the national wealth distribution have a median net worth of only $310.”
Axios: “How to make poorer Americans richer” — “If you’re happy with your retirement plan, there’s a very good chance you’re a federal employee. Now there’s a bipartisan proposal to extend that excellent service to the people who need it most — middle- and low-income households who don’t have any retirement savings at all.”
New York Times: “Rescue Package Includes $86 Billion Bailout for Failing Pensions” — “Tucked inside the $1.9 trillion stimulus bill that cleared the Senate on Saturday is an $86 billion aid package that has nothing to do with the pandemic.”
This article was originally published on WBUR.org.
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