“Universal Savings Accounts” to Supplement Social Security
Today, many Americans are saving less than they once did. And with the baby boomers about to begin retiring, we cannot afford to ignore that this is not a nation of savers.
In the past two years, America’s personal savings rate reached its lowest level since the Great Depression. In comparison to other industrialized countries, the United States ranked second to last in personal savings.
Saving benefits the entire economy. An increase in savings enlarges the pool of capital available for businesses to invest, create jobs and improve our standard of living.
An estimated 75 million working Americans — nearly half the work force — lack access to an employer-sponsored savings plan that helps put away money for retirement. At the same time, too many who have access to a savings plan contribute too little, don’t participate at all, or start saving too late. While the typical American begins working at age 22, most do not participate in an employer savings plan until age 41.
Over the past 30 years, we have offered a blizzard of tax initiatives to encourage individuals to save for their retirement, including spending $125 billion in tax subsidies last year to encourage retirement savings. Still, the national savings rate has plummeted.
In the last Congress, I proposed legislation that took a different approach by helping companies automatically enroll employees in their 401(k) plans, rather than relying on workers to fill out the necessary forms to participate. According to a recent survey conducted by Hewitt Associates, the newly enacted Pension Protection Act of 2006 will incentivize roughly half of all companies offering a 401(k), or similar plan, to enroll new employees automatically. If we make saving simple by limiting the amount of time, effort and decisions that people have to make, we can dramatically increase the number of people who save.
But in addition to making saving easy, saving should also be universal.
Democrats and Republicans have approached these goals in different ways, and its time to combine the best of both parties’ ideas. Republicans have long advanced the idea of personal accounts inside of Social Security. And it’s true that an accounts-based system that supplements, not supplants, Social Security is feasible. Democrats have argued that 401(k)s and personal savings are important supplements to Social Security, but that fees should be kept low so that lower-income Americans should enjoy the same opportunity to save as upper-income Americans. We can make that happen.
Here’s how. Building on the principles of personal accounts, universal savings and the desire for simplicity, we should create “Universal Savings Accounts” to supplement Social Security. Employers and employees would contribute 1 percent of paychecks on a tax-deductible basis. Additional contributions could be made to the accounts at individual worker’s or company’s discretion.
To ensure low management fees, these accounts would be managed by the private sector but overseen by a quasi-public board with fiduciary responsibility for the types of investment options that workers could select. This system is used by the successful federal 401(k) program, or Thrift Savings Plan, where the annual management fees have averaged 30 cents for every $1,000 invested. With this approach, Americans will know that money put away for retirement will be available for retirement.
To achieve universal participation and simplicity, employers would automatically enroll their employees in these accounts but allow employees to opt out. Individuals could increase the amount they save, but their decisions would be age-appropriate because investments would be made in so-called “lifecycle funds.”
Additionally, we should strengthen the Saver’s Credit - a federal tax credit that matches savings put into retirement accounts - to provide an additional incentive for low-income workers to participate.
This approach protects the sanctity of the Social Security system, and ensures that it will remain a solid foundation for retirement. But it expands individual savings opportunities outside of Social Security to provide all working Americans an easy way to make their retirement more secure.
NOTE: A lengthier version of this idea was published in the Wall Street Journal on September 13, 2007.
October 12th, 2007 at 2:11 pm
Social Security is a Ponzi scheme. It only works as long as more people pay in than take out. We need a real investment alternative. There are plenty of annuities and savings plans offered by private insurance and can operate more efficiently than social security. As a compromise, I suggest that when a person retires, he receive a voucher from the Soc. Soc. Adm. for the amount of his contributions plus a reasonable rate of return based on some index. The person can take that voucher and purchase an annuity from a private company. The person gets the value of his savings throughout his/her retirement and the government exstingushes a libility. Best of all, Congress can’t buy votes by increasing benefits beyond what people pay in.