It’s hard to imagine a more dysfunctional welfare program than the American jumble of retirement savings accounts. It costs hundreds of billions of dollars a year, excludes tens of millions of workers and does not guarantee a comfortable old age for those who participate.
The United States can do much better, at no additional cost. It won’t be easy, but there are examples to follow – including within the federal government itself.
A telling measure of the value of the current system is how little real harm its disappearance would do. Employers would be relieved of the costs and regulatory headaches of the 401(k) plans they administer for employees. Investment managers would lose some of the excessive fees that 401(k) accounts tend to generate – but it would be a plus for savers. Many workers would hardly notice: by one estimate, nearly 90% of tax breaks for retirement savings go to the wealthiest 20% of U.S. households, a group that would save anyway.
Yet people are demonstrably bad at handling the complex task of saving enough for retirement on their own. They need help, lest they end up overwhelming national safety net programs. So what would a better system look like?
First, it must be universal. Anyone with a Social Security number must be enrolled in a government-supervised retirement savings account. A small percentage of their earnings, say 3%, would be automatically deposited unless they opted out.
Second, it should be simple. Fortunately, the United States already has a working model: the Thrift Savings Plan for federal employees. Under the scheme, contributions are automatically invested in lifecycle funds, which shift from riskier to safer assets as people age. Participants who want more control can choose from a curated menu of conservative, privately managed funds. Limited options, large cash reserves, and government oversight keep fees extremely low and maximize returns. At retirement age, account holders are offered a small selection of simple annuities, which provide regular payouts for as long as they live – a conversion that could be made automatic, with payouts adjusted according to age. ‘inflation.
Third, it must guarantee portability. In the current setup, workers depend on employers to manage 401(k) plans that must be “renewed” every time they change jobs – a holdover from a bygone era when employers used the (often false) promise ) generous pensions to bind people to their positions. Instead, accounts should belong entirely to holders, staying with them wherever they go. And people should be able to easily consolidate their existing 401(k) accounts into the new plan. This would benefit the economy in more ways than one, allowing businesses to focus on their real business and workers to change employers more freely.
Fourth, it should be progressive. Instead of providing the largest benefits to the highest earners, the government should encourage low-wage workers to set aside money for retirement by matching their contributions. If the over $200 billion cost of the current system were redirected, the lowest incomes could easily receive an annual quid pro quo of $1,000 or more, without increasing deficits or the federal debt. If people were additionally allowed to dip into their accounts for occasional emergency expenses, they could save billions more that would otherwise go to interest on often predatory payday loans.
The choice is clear. Legislators can continue to tinker unnecessarily with a broken system. Or they can start over and fix the problem.