But More Needs Doing To Cover 50% Of Americans With No Real Pension

AOC and Kevin McCarthy agreed on a bill and voted together in the House of Representatives! Really. It’s true!

Bipartisanship lives on. In March, Democrats Alexandria Ocasio Cortez and Nancy Pelosi and Republicans Marjorie Taylor Greene and Kevin McCarthy—all four in opposite corners of the American political scene—voted for SECURE 2.0, a retirement reform bill which passed out of the U.S. House of Representatives with a vote of 417 to 5. It is now in the Senate.

But, SECURE 2.0 doesn’t go far enough in creating a decent American pension system. What does anyone need from a pension system? You need to save consistently; you need enough money in that plan; you need that money invested well at low fees; and you need the money for life. SECURE 2.0 doesn’t give you any of that. But SECURE 2.0 is a a first step—auto enrollment and auto escalation in particular, anything to get people saving for the long run and for a long time.

Americans Are Worried Sick About Their Retirement Income Security

No wonder the bill had such amazing appeal. The end of guaranteed pensions, a process that started back in the 1980s with the rise of the 401(k) and the Individual Retirement Account (IRA), made running out of money in retirement one of the top financial concerns in the nation. 82% of American voters believe that retirement security is a problem for the country according to the Retirement Security and Wealth Attitudes National Voter Survey by the Economic Innovation Group (EIG), which also found that 91% of voters agree that all working Americans should have the ability to participate in a retirement savings plan. The fear is well founded.

The Employee Benefit Research Institute, a think tank with access to industry data on retirement savings, projects that 41% of households headed by working-age adults will run short of money in retirement. And while retirement security is important for all Americans, it is hardest to achieve for low-income workers, those without college degrees, people of color, and single women—groups that often have limited access to both the financial tools and the income required to build robust savings. At any one point in time more than half of workers are not saving in a retirement plan at work. The pandemic recession just made things worse; an additional 3.1 million older workers will fall into poverty in retirement.

And being worried about financial security can make you sick. Happiness and security also stems from the way one’s retirement income is delivered. Researchers found that among retired people with the same wealth and income, having a stream of income for the rest of one’s life is associated with higher levels of well-being compared to an equivalent lump sum that one must manage to last a lifetime.

That Americans have inadequate retirement savings shows that the current individual-directed, voluntary, and employer-centric system of retirement savings doesn’t work, especially as the labor market changes.

How Secure 2.0 Doesn’t Go Far Enough

With the House recognizing that retirement security is a pressing national issue in passing SECURE 2.0, and the Senate likely to move on companion legislation this summer, I urge the Congress to build on that legislation with a tool which would complement both the current private retirement system as well as the proposed SECURE 2.0 legislative package.

In my unlikely — because we are also on opposite ends of the political spectrum, but productive partnership of two economists which we are — with Economist Kevin Hassett (formerly of the Trump Administration), we helped EIG outline a plan that would give most people without a retirement plan access to the same professionally-managed options in the federal Thrift Savings Plan (TSP)—the retirement savings plan offered to government employees and Members of Congress, and provide a government match to their contributions. EIG’s survey showed a high level of support for the plan among participants.

What Is Good About SECURE 2.0 And What Could Be Better?

Whereas Hassett’s and my approach focuses on expanding coverage to workers who have traditionally been boxed out of sophisticated portfolios and offers federal matching contributions for low- and middle-income workers to further reward work and incentivize savings, at the end of the day the practical effect of SECURE 2.0 would perhaps be on improving contribution rates for workers who are already covered by workplace plans.

SECURE 2.0 would require new 401(k) and 403(b) plans (with some limited exceptions) to include automatic enrollment with a default contribution rate of between 3% and 10%, as well as automatic escalation of 1% per year up to a maximum of at least 10%, but no more than 15%. This provision would not apply to existing plans, to businesses with less than 10 employees, or to businesses that are less than three years old.

But the legislation doesn’t require employers to offer a retirement plan—indeed, such a mandate would be hard on smaller businesses that do not have the economies of scale of their larger competitors, and not having access to a plan is one of the major reasons that most people don’t have enough retirement savings. Workers save when they have the opportunity to save. The bill does offer limited incentives for employers to start a plan[1] if they don’t already have one, but the incentives don’t overwhelm the business reasons to choose not to put their workers in a retirement plan. Though it does require the Treasury Department to start a public awareness campaign about the underused Saver’s Credit, SECURE 2.0 does not require the government or employers to help workers save for their retirement by providing a match. We know from past experience that providing a match is a very effective way to encourage workers to save and to save enough.

Why did the progressive and left wing of the Democratic party support SECURE 2.0?

SECURE 2.0 is an improvement on the status quo, which inadequately supports its elders in old age. America’s elders die sooner and are sicker than their counterparts in other rich nations. American elders also must work longer than their cohorts abroad. The progressives know that getting workers covered early and having them contribute often might help them supplement their Social Security benefits and improve quality of life in retirement.

Why did the Republicans and the right wing of the party support this plan?

The Republicans, and even their most right-wing party members, supported SECURE 2.0 because it will enable more people to save more money to retire with dignity and be less reliant on social programs later in life.

Features of SECURE 2.0 that help the highest income earners include more generous tax breaks for large contributions and letting people with IRAs delay when they have to withdraw from their accounts—an issue only very high-income people are concerned with. The plan would also increase catch-up contribution limits for those over 50 years old by indexing catch-up contributions to inflation and increasing the catch-up contribution limit for 62, 63, and 64 year-olds to $10,000 for a 401(k) or 403(b), or $5,000 for a SIMPLE IRA (up from $6,500 and 3,000, respectively, under current law). Studies by labor market researchers at various universities and at the Federal Reserve show that only the highest- educated and high-income workers experience significant real wage gains after the age of 45. For most people this catch-up age group is the time they probably can’t save because their income is falling in real terms. This is unquestionably a good thing for those retirement savers, but it fails to address the distributional problems of retirement insecurity, namely that low- and moderate-income workers have virtually no savings at all.

Moving Forward Towards A Real Pension Plan For All Americans

Expanding coverage in a plan is essential for any real pension system to work. Who isn’t covered now? Only 54 percent of older workers between the ages of 62 and 65 have access to employer-sponsored retirement plans and only 49 percent participate in these plans. As older workers age, and in many cases become self-employed, it gets worse. Among 66–69-year-old workers, the participation rate falls to 33 percent.

In stark contrast to SECURE 2.0, the Ghilarducci/Hassett/EIG retirement proposal would expand coverage so that anyone without a plan would be automatically enrolled into a life-cycle fund at a specified percentage of income.

Significant contributions is an essential element of a real pension system. In the EIG proposal low- and middle-income workers would receive matching contributions in the form of a refundable tax credit deposited directly into their retirement account. Eligibility for the credit would be phased out based on earnings, and the phaseout would begin at median income. Only workers who do not have access to retirement plans at work would be eligible for the credit (workers with existing employer plans would be ineligible).

Participants could choose to opt-out at any time, but that would cost them the government match, making them much less likely to do so.

In sum, saving is one thing but accumulating enough when you save is vital. Workers on their own have never shown to be able to save 10% of their pay since their first day of work at 18. Employer contributions and generous government subsides fuel the high earning group and unionized employees’ pensions. Workers will also save more if they have a match.

Good investments is another key to a good pension system. Everyone deserves to have the high-quality investment portfolios one sees among the well-off with non-conflicted fiduciary advisors or in a pooled defined benefit plan. A high quality pension plan should be available to all. In the end this plan is not just about building wealth for its own sake, it is about building security so that people are allowed to live a decent life in retirement It would also increase tax benefits for small employers who offer plans.* Specifically, it would increase an existing tax credit that covers plan startup administrative costs, from 50% to 100%, up to an annual cap of $5,000. It would also establish a new tax credit for small employers that would offset up to $1,000 in per-employee retirement contributions in the first year, phased down gradually over five years.

The EIG-Ghilarducci/Hassett “TSP FOR MOST” Plan checks all the boxes of a decent national pension system: all workers save consistently; workers get a match to boost the level of savings; the money is invested well at low fees; and it provides annuitized money for life.