A pair of academics are out with (yet another) policy proposal to address the retirement crisis, the assumption being there is one at all.
Despite a thorough deconstruction of the “crisis” talking point by American Enterprise Institute’s Andrew Biggs, Vanderbilt’s Ganesh Sitaraman and Yale’s Anne Alstott nevertheless persist.
Their argument rests on the dubious premise that a sizable switch from defined benefit to defined contribution retirement plans means “workers have been forced to assume more and more financial risk, and as a result, many won’t have enough to live with dignity when old age arrives.”
The causal thread quickly unravels (added risk doesn’t mean a dearth of retirement funds, it’s often the opposite), and they appeal to the authority of the Center for Retirement Research at Boston College in claiming half of workers will reach retirement “with too little savings to fund it.”
Yet they fail to note the very same Center recently found DC/DB replacement rates essentially on par.
“When tens of millions of Americans all have the same problem of setting aside too little money for retirement, it’s not a failure of individual initiative,” they write. “It’s a sign of a structural problem—one that can’t be solved by scolding people to save more.”
We agree, and the reason for the rise of the auto revolution (enrollment, deferral, escalation and possibly portability) and other innovation in plan design making undeniably large impact retirement savings rates for American workers.
“Fortunately, this is a problem that a public option for retirement savings can help fix.”
If the words public option and fix sent shivers to your spine, you’re not alone.
They unironically propose government help in the form of a “supplemental pension—in addition to Social Security—that is federally administered, open to everyone, and simple and safe to join.”
They then use, assuming a straight face, the postal service as an example, before noting Social Security’s coexistence with private savings plans.
The proposal
Here’s how their public option would work:
Every American would automatically be enrolled in a retirement program that would withhold, say, 3 percent or 5 percent from every worker’s paycheck. The money would be deposited in a retirement savings account managed by the federal government, and the savings would be locked up until retirement. Savers would have limited investment choices, and the short menu would include only low-fee index funds, such as a “life cycle” fund targeted to the saver’s intended retirement date. At retirement, the balance would be converted to a life annuity, paying a guaranteed sum every month for the rest of the worker’s life. No one would be required to participate, and market options would compete side by side with this public program.
Color us skeptical of the last sentence.
Sitaraman and Alstott lament the fact that workers can’t count on a fixed sum of money every year in retirement under with a defined benefit, failing to note (as Ted Benna often points out) that the “fixed” sum was far from fixed.
The omission is emblematic of larger problems with their proposal; no system is perfect. Yes, coverage and access rates must increase, but strides made in the private retirement system since 2006 in the last decade are nothing short of astounding.
Far from a Ghilarducci-like Guaranteed Retirement Account or public option administered via government fiat, the private defined contribution system is real, and working.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
