The odd couple of retirement
Retirement can make strange bedfellows. That’s what I thought when I prepared to interview left-leaning labor economist Teresa Ghilarducci and Kevin Hassett, chairman of the White House’s Council of Economic Advisers during the Trump administration. Perhaps the only topic that could bring together this odd couple is the woeful state of retirement security in the United States.
I first met Ghilarducci after she had cowritten (with Blackstone Group’s Tony James) “Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans.” In 2018, the authors declared, “The U.S. experiment with 401(k)s and
IRAs, launched in the early 1980s, has failed miserably to deliver on its promises.” Their prescribed fix was to create a Guaranteed Retirement Account (GRA), which would mandate retirement savings for everyone, including those who work part time or are self-employed.
Fast forward a few years, through a pandemic, and you can guess how much progress has been made on restructuring retirement: ZERO. Maybe the GRA was too ambitious, too drastic, too much of a change for lawmakers to wrap their heads around. So when Ghilarducci came across Hassett’s idea of using the federal government’s Thrift Savings Plan (TSP) as a model for retirement for all Americans who do not currently have access to a plan, she jumped aboard and the two started working on the details.
They start with a dismal fact: “The median retirement savings balance for the bottom 50% of American families is $0.” The reason is that roughly a half of workers do not have access to or do not participate in an employer-sponsored retirement plan. As you might expect, low-income workers are bearing the brunt of a system that relies on employers to provide retirement benefits and, in turn, the lack of savings “significantly disadvantages future generations, leaving low-income children responsible for the financial security of their parents and stunting their ability to save for their long-term needs. This cycle only solidifies the intergenerational nature of the wealth gap.”
To meet the need and to address the gap, Ghilarducci and Hassett propose providing low- and moderate-income Americans access to a program modeled after the TSP, which features automatic enrollment for eligible workers, simple asset allocation options, low expense ratios and matching government contributions. While the plan has not been scored by CBO, the authors believe that even though Uncle Sam would have to take a short-term hit to the deficit, over the long term, the plan could be implemented “at relatively little cost to the federal government.”
It’s notable that tucked into the Democrats’ $3.5 trillion Build Back Better Act is a section that attempts to expand retirement account availability to more Americans. If passed, starting in 2023, companies with more than five employees that do not already offer retirement plans would be required to automatically enroll workers in Individual Retirement Accounts (IRAs). In that first year, companies would have to deduct a base level of 6% from each worker’s pay and would have to increase the amount by 1% annually until reaching 10% of pay. Companies that fail to comply would be fined $10 per employee per day for up to three months.
While this may provide access to more than 60 million Americans, there is a noticeable flaw: Workers could opt out if they chose to do so. And, of course, the Ghilarducci/Hassett plan removes the onus of the employer to establish the plan, and it proposes that the government would provide financial support — a match from Uncle Sam. Given the success of the TSP, it seems a lot more likely that the odd couple’s plan has a better chance of success.