Suggested SOTU Topic: Increased Savings on Top of Social Security

Tonight’s State of the Union speech will likely elevate the concepts of investment and competiveness as a way to highlight the administration’s approach to economic recovery. I’ll be listening to see if he places a spotlight on helping families increase their savings as a means of increasing their economic security over the long term. And although details may be sketchy, I do expect him to talk about dealing with the deficit over the long term. Many will measure his seriousness on this topic by whether or not he embraces the recommendations of his appointed deficit commission, and specifically the degree to which he supports their proposals to reform Social Security. I’m not sure this is fair.

Early word is that President Obama is going to avoid negotiating with himself on the future of this program. This probably makes sense because until there is evidence of meaningful compromise on other issues, a deal on Social Security is unlikely. For starters, Social Security is a bedrock program, which has done much heavy lifting in lowering poverty among the elderly. In 1966 (the first year of measurement) poverty among seniors was at 28.5 percent; today it is closer to 10%. Social Security is even more important today because retirement savings are skewed heavily by income, with lower income Americans almost entirely dependent on Social Security for their sole means of support. A projected 40% of today’s baby boomers are likely to depend almost completely on Social Security after age 70, just as lower-income seniors do today.

However, even a dead-end debate on Social Security may have an upside, especially if it opens the door to a set of policy changes that can enhance retirement security more broadly. Common ground can be found in advancing a set of policies that promote savings throughout the life course. Over an extended time horizon, higher savings at the household level will help families deal with uncertainty, manage risk, and increase their long-term economic security. One shared goal for policymakers should be to help workers build up and diversify their savings.

America’s real retirement security crisis is not Social Security solvency, nor even companies freezing their traditional Defined Benefit plans. The larger problem is that a steadily declining minority of adults are participating in any retirement plan—whether pension plans, 401(k)s or IRAs. For those with access, America’s employer-based retirement system provides powerful saving incentives—both tax breaks and employer contributions—as well as the convenience and discipline of automatic payroll deduction. Unfortunately, employer plans cover fewer than half of all workers—leaving more than 75 million on the outside. Only 43% of all private-sector workers participated in an employer-sponsored retirement plan in 2006, a striking decline from the 50 percent participation rate in 2000.

Declining participation in savings plans is particularly troubling when workers are eligible to participate but just don’t. Previous conventional wisdom treated savings as a personal virtue to be encouraged as a good habit. Recent work in the field of behavioral economics has generated a new insight: people don’t choose what’s best, they choose what’s easy, and the easiest way to save is when it happens automatically. The challenge is to get people enrolled in 401(k)-type arrangements, so that payroll deductions provide a steady stream of deposits into low-cost savings plans.

The administration is already supportive of creating a network of Automatic IRAs. Under their “AutoIRA” proposal, all medium and large firms that don’t currently offer 401(k)-type plans would institute a payroll deduction option, with funds to be directly deposited in a low-cost, diversified individual retirement account. Employers would have the choice of either automatically enrolling employees or requiring employees to “opt out.” Such a policy would benefit the more than 42 million employees whose employers do not offer retirement savings plans. While this approach still leaves out scores of part-time and nontraditional workers, it is a start at filling the savings gap.

Responsible Republicans may decide to add their support to creating such a mechanism, as the proposal has its roots at the Brookings Institution and the Heritage Foundation. Both sides should be attracted to the relatively low cost of this approach since it does not depend on creating a new subsidy stream. Even if gridlock prevents changes to the Social Security program, there will be advantages to both sides of the political spectrum if more families are able to build up savings before they need to tap their Social Security benefits.