Events Explore New Retirement Savings Ideas

Two events this week explored some important policy territory for government supported retirement savings accounts. First, at the Center for American Progress Action Fund, a panel of experts and policymakers met on Tuesday to discuss the future of retirement security in light of proposed cuts to Social Security, the marked shift from defined benefit to defined contribution plans, and the possibility of state-level action to ensure greater access to savings opportunities. Yesterday, an event at Brookings explored the implications of a recent study suggesting that tax incentives may be an ineffective tool for promoting retirement savings. While each discussion featured a range of perspectives, both highlighted the success of default features like automatic enrollment and explored the potential of retirement accounts tied to the worker rather than the workplace. Still, the question remains: how can retirement policy effectively help workers both contribute to their accounts and maintain their balances until retirement age?

The event at CAPAF, Increasing Retirement Security by Strengthening Workplace Retirement Plans, highlighted a new initiative in California, the California Secure Choice Retirement Program, which would create a retirement account for each of the state’s 6.2 million private sector workers who currently lack access to a plan through their employer. Key features of the plan, which Michael Calabrese described on the Ladder last year, are automatic enrollment with an opt-out provision; a three percent default contribution rate; and a modest guaranteed rate of return, secured by private insurance. State Senator Kevin De Leon, the lead sponsor of the bill, expressed his hope that the new program would bring about a “paradigm shift” in retirement saving in California. Additionally, De Leon noted that automatic enrollment was essential to realizing this change, and described how actually witnessing an account balance grow can be far more powerful than the abstract ideal of saving.

The conversation at Brookings, Tax Expenditures and the Deficit: Time to Rethink Retirement Saving Policy?, also explored larger structural issues in our retirement savings system by examining the findings of a recent study by researchers from Harvard, Raj Chetty and John Friedman, who looked at data from  Denmark to draw lessons about the American system of retirement savings. The paper (“Subsidies v. Nudges: Which Policies Increase Savings the Most?”, we wrote about it back in November) posits that policies like automatic enrollment and default contributions are more likely to increase overall savings than increased tax subsidies of retirement accounts. The explanation lies in the distinction between “active” savers (around 15% of total savers) who respond to shifts in policy, and “passive” savers who don’t adjust their saving behavior when rules change (the remaining 85%). Passive savers are less likely to be wealthy than active savers, and thus default features can be particularly impactful for low-income workers. The applicability of these findings from Denmark to the US system was a subject of some disagreement, as other members of the panel argued that the variation between the US and Denmark and the retirement savings systems is too great to allow meaningful comparison.

The authors acknowledged concerns that reducing or eliminating the tax subsidy could affect employers’ decisions to offer retirement accounts; however, they also noted that it’s not essential for all retirement plans to be tied to a particular workplace. This suggestion speaks directly to the California plan, which would create a portable account that stays with the worker as they move from one job to the next. Additionally, moderator Bill Gale commented that even without a significant tax incentive, many firms would want to offer retirement plans because they have become an expected part of a competitive wage package.

Still, while getting workers enrolled and contributing to retirement accounts is one challenge, getting them to wait until retirement to access those funds is another. A recent study from Hello Wallet documented the discouraging prevalence of early withdrawals by low and moderate income workers. In 2010, Americans contributed $176 billion to their retirement accounts—but withdrew $70 billion, often just to pay daily expenses. These withdrawals are subject to both a 10% federal penalty and the income tax, meaning that a disconcerting number of workers are losing more than they gain by trying to save for retirement.

To avoid this problem of “breaching,” one obvious solution is to make accounts inaccessible to beneficiaries until retirement and to require annuitization, as with traditional pensions. Indeed, this is a feature of the USA Retirement Fund, the universal retirement plan proposal championed by Senator (and CAP panelist) Tom Harkin. Yet without access to liquid savings that can address more immediate needs and changes of circumstance, many workers may feel understandably reluctant to lock away their savings for the future at the cost of increasing their financial vulnerability in the present. Initiatives the would create the incentive for saving in a wide variety of accounts, such as the Financial Security Credit, would be one way to support both the short and long-term savings needs of low and moderate-income workers. Similarly, workplace programs that would provide opportunities to save for emergencies or shorter-term goals could take advantage of the same payroll deduction infrastructure as retirement contributions while increasing the likelihood that workers’ retirement savings are actually available at retirement.