January 2, 2016


A Smarter Plan to Make Retirement Savings Last (TERESA GHILARDUCCI and HAMILTON E. JAMES, JAN. 1, 2016, NY Times)

We need a bolder plan, which we are calling the guaranteed retirement account (G.R.A.). Under our proposal, all workers and employers will have to make regular payments into a G.R.A., which builds until retirement age, then pays out a supplemental stream of income until that person and his or her beneficiary die. [...]

In our plan, the more than 95 million workers without a pension plan would each have his or her own G.R.A. managed by an independent federal agency. Workers and employers would each contribute a mandatory minimum of 1.5 percent of the salary or contract. The current tax deduction for retirement savings would be converted to a $600 refundable tax credit to pay for the contributions of households below median income.

Workers could not withdraw money early, even for emergencies -- and they won't like that. But allowing exceptions creates a slippery slope. Just as Social Security is protected from early withdrawal, retirement accounts should be used for old-age income. Employers won't like paying more. But in return, they are free from administrating and worrying about providing retirement plans if they don't offer a 401(k) or pension. In the long run, employers would benefit because a nation of financially secure retirees would pre-empt higher corporate taxes.

Individuals would not make investment decisions directly. Instead, low-fee diversified retirement portfolios would be created by a board of professionals who would be fiduciaries appointed by the president and Congress and held accountable to investors. The fees and investments would be much less prone to corruption because the managers' income would not depend on the investments, the fees would be disclosed, and the accounts separated from government funds and owned by the individuals.

Since contributions would be pooled and fees kept low, a guarantee of a return of around 3 percent -- about half the expected return on stocks over the long term -- would be essentially costless even as the underlying rate fluctuated with the market and inflation. For someone making an average salary of about $48,000, a 3 percent contribution would yield about $170,000 over a lifetime. Three percent is not an adequate saving rate, it is a starting base. Our plan would provide a lifelong annuity, like a defined benefit plan, so no one would face the risk of outliving his or her money.

Any remainder should go into the heirs' accounts.

Posted by at January 2, 2016 9:56 AM