There have been some modest attempts in the past few years to shore up and fill in gaps in this country’s haphazard system of retirement savings. These attempts – federal myRA accounts, state-run retirement accounts and fiduciary standards for retirement account providers – have also all been shut down, rolled back or delayed since Donald Trump moved into the White House a year ago.
So, it may seem like a curious time to talk about tossing aside the current system of 401(k)s and individual retirement accounts in favor of an entirely new retirement savings system, as Teresa Ghilarducci and Tony James do in their book, “Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans.”
Ghilarducci is an economics professor at the New School for Social Research in New York who became kinda-sorta famous after she told a House subcommittee in October 2008 that 401(k)s gave big tax breaks to the affluent while not helping most Americans save adequately for retirement. James is the president and chief operating officer of private equity giant Blackstone Group LP, as well as nonexecutive chairman of the board at Costco Wholesale Corp.
The two unveiled their unlikely buddy act in 2015. The plan they have developed would supplant 401(k)s and individual retirement accounts with mandatory Guaranteed Retirement Accounts that have these defining characteristics:
1. Workers and employers would each contribute 1.5 percent of wages or salary, maxing out at $3,750 each; the self-employed would contribute 3 percent.
2. Everyone contributing to a GRA would get a $600 refundable tax credit. On top of that, there would be a tax deduction for contributions maxing out at $3,750. Workers could still contribute to GRAs up to the current 401(k) limits of $18,500 and $24,500 and enjoy tax-deferred gains on those contributions; they just wouldn’t get the upfront tax deduction.
3. Workers would own their GRA accounts and choose a pension manager to invest the money. But they wouldn’t be able to withdraw money from the accounts before retirement.
4. Upon retirement, the accounts would be converted into annuities, with monthly payments calculated and administered by the Social Security Administration.
Defined-benefit pension funds get a lot of bad press, some of it deserved. But when a state pension fund runs into trouble these days, it’s usually because elected officials have promised too much and/or failed to set aside enough money, not because the fund managers have blown it. In the Ghilarducci-James plan, “state pension funds, traditional money managers, or a federal entity such as the Thrift Savings Plan” could bid to manage GRAs. These pension managers would get higher returns than existing 401(k)s and IRAs do, they figure, because they’re more sophisticated investors than most 401(k) and IRA owners; they’ll be able to invest in illiquid assets such as infrastructure and private equity that are generally off-limits in 401(k)s and IRAs; and their administrative costs would be lower, as would their fees.
Incremental improvements to the current system seem a lot likelier than a massive overhaul such as the GRA. But the Ghilarducci-James plan raises several issues that really ought to be a part of any national discussion about retirement. One is annuitization. Another is the wisdom (or lack thereof) of leaving individuals in charge of all their retirement saving, asset allocation and investment decisions, which has been addressed by some 401(k) sponsors in recent years … but is still a big issue for the IRAs that most 401(k) accounts eventually get rolled into. Finally, there’s the question of whether the more than $200 billion in annual tax breaks for retirement savings should mainly benefit the top 20 percent of the income distribution, as is now the case, or be targeted to make it more likely that everybody has an adequate retirement income.
Justin Fox is a Bloomberg View columnist.
