The greatest fear of many Americans is that they won’t have enough money for retirement.
Just over half – or 53 percent – of all full-time workers participate in an employer-provided retirement plan, according to the Employee Benefits Research Institute. Employers have long been phasing out defined benefit pension programs in favor of 401(k)s and other work-based retirement accounts. During the recession and afterward, many people’s personal savings were depleted as they dipped into retirement money to pay the rent or make ends meet.
Many young people also seriously question whether Social Security will be able to pay them anything by the time they retire. What to do?
The Third Way, a Washington centrist think tank, has unveiled a novel idea that may generate a lot of interest among worried workers – if not necessarily among their employers.
The idea is to create a Savings Plan for Universal Retirement accounts, with the centerpiece a 50-cent-per-hour minimum retirement contribution from all employers to just about all workers. Contributions put in this account would automatically go into a privately run low-fee life-cycle fund made up of a mix of stocks and bonds tailored to the employee’s age and distance from retirement.
“If we are to improve retirement savings for every American worker, we should have a minimum pension to help create real wealth for the middle and working classes,” wrote David Brown and Kimberly Pucher, co-authors of the report.
A 50-cent minimum pension, adjusted for inflation, would amount to a minimum yearly employer contribution of roughly $1,000 for each full-time worker. “It would improve retirement security for the 47 percent of these workers who are not currently contributing to any employer-sponsored retirement plan,” according to Third Way officials. “Contributions would begin early on, so even small amounts would have decades to grow.”
How much? If stocks and bonds enjoy the same average rates of return as they did over the last 45 years, someone who begins earning income at age 22, receives only the minimum contribution each year, and retires at age 67 would have a balance of approximately $160,000, in 2013 dollars. By contrast, the median couple — not individual — approaching retirement today has only $42,000 in private retirement accounts.
Past gains are no guarantee, of course, but over the long term, investments in diversified stock and bond funds have usually paid off. Since this is on top of Social Security, a certain amount of risk is acceptable.
Businesses might not be wild about the added cost, but the authors say Congress could step in and blunt the impact of the added costs with changes in the tax code. This policy isn’t meant to replace current pension plans; employers that still provide retirement benefits would satisfy the new requirement. It is geared to individuals not saving in the existing system. And it would be completely portable, like a cell phone number.
The Third Way stresses this is much different from what former President George W. Bush once proposed when he sought to privatize Social Security in 2005. “Under the new plan, Social Security remains as is, but every worker would also have his or her own private Individual Retirement Account,” the think tank said.
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