We all need to be saving for retirement. But, the options for many of us are slim. Some of us have 401(k) plans, which have their own limitations. Labor economist, Teresa Ghilarducci proposes we all have a federally managed savings plan which, like Social Security, can weather the ups and downs of the financial marketplace and deliver secure returns in retirement at low-cost. A Guaranteed Retirement Account guarantees the investment, an annual rate of return and an annuity (annual payment) in retirement.
Federal Government Retirement Accounts would be retirement plans administered by the Social Security Administration that all employers would be required to offer their employees to better assure that Americans can retire with dignity. Ghilarducci sees the 401(k) retirement savings program as failing to allow for a good retirement because it does not guarantee enough savings or retirement income and does not cover enough workers. Income and savings for workers in retirement are far lower than most people realize.
Today, taxpayers are subsidizing 401(k) plans for the wealthiest Americans to the tune of $110 billion, but most Americans are not saving enough for retirement. The Government Retirement Accounts would require a 2.5 percent payroll contribution by employers and workers on top of Social Security and Medicare contributions up to the $118,500 Social Security cap. The federal government also could make a contribution through a revenue neutral $600 tax credit.
Other countries such as Britain, Australia and New Zealand have mandatory savings programs. Their goal is to ensure higher savings rates, especially in light of people living longer and saving too little. These programs all supplement public pension programs.
Australia requires employers to contribute 9.5 percent of pay, up from 3 percent in 1992, when the program launched. In 2025, the contribution is set to go up to 12 percent of workers’ pay. New Zealand and Britain have newer programs and require lower contributions for now. Of note, the British program was launched by the Conservative government and is supported by conservatives because it is not a tax.
Recently, the U.S. federal government began offering myRA, which is a toe in the door for a more robust federal retirement savings program. And, some states are working to establish their own mandatory savings plans, which creates further impetus for federal action.
Social Security replaces less than 40 percent of a typical worker’s income in retirement. People should be saving in order to replace another 30 to 40 percent of income. The question becomes why not simply expand Social Security, a much simpler solution than Guaranteed Retirement Accounts, as Nancy Altman proposes.
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