President Barack Obama wants to give low-wage workers a new way to save for retirement. His proposal might do some good — not by helping workers, most of whom are unlikely to take advantage of it, but by spurring a discussion about how to fix a broken retirement system.
It’s beyond dispute that the system is failing. Only 1 in 2 workers has access to a retirement plan through an employer. Half of Americans aren’t saving anything at all for retirement. And Social Security benefits, which averaged $1,269 a month in 2013, are barely enough to keep people out of poverty.
Obama says he’ll offer workers the chance to direct part of their pay toward new retirement accounts sponsored by the Treasury Department. They’ll have low minimum contributions, returns tied to the yield on government debt, guaranteed principal and no fees. “My Retirement Accounts,” or MyRAs, won’t require congressional approval — which is good and bad. It’s good because it means something will happen; it’s bad because without legislation, the government can’t make employers offer the plans or tell workers they’re covered unless they choose not to be.
Without compulsion or inducements, participation in MyRAs is likely to be small. Fewer than 1 in 10 workers who are eligible to contribute to existing Individual Retirement Accounts bother to do so. In his State of the Union address, Obama also asked Congress for legislation to create IRAs with automatic deductions and require most employers to offer them. Payroll deductions would still be voluntary as far as workers are concerned, but workers who don’t want to save this way would have to opt out. That would raise the participation rate a lot. But Congress has to go along.
The MyRA proposal and the auto-enroll IRA are both good ideas, but neither really measures up to the scale of the problem. Employer contributions to retirement savings, whether in the form of defined-benefit pensions or employer-matched 401(k) plans, have fallen. Without those contributions, especially in programs that encourage or require workers to make contributions of their own, most Americans are saving too little to retire in comfort.
Solving this problem is a formidable long-term challenge. It will require wholesale reform of taxes on savings, such that the generous reliefs granted to high-income taxpayers are consolidated, simplified and shifted to those with low incomes, as Obama rightly noted.
It will probably require gradual reform of Social Security as well, so that more generous benefits are given to those who need them, with the cost recouped from the better-off through lower benefits and higher contributions. That’s a can of worms that Obama had no intention of opening — but don’t expect the subject to go away.
A retirement-savings crisis is coming. MyRAs will help a bit, but the problem will eventually demand much bolder thinking.