Something to Agree On
With the candidates attacking each other's tax platforms, agreement over even tax policy basics seems elusive. But there is an exception. Both candidates want to encourage workers to save more through the Auto IRA.
The essence of the Auto IRA is to make retirement saving automatic. It would mandate that employers deposit a portion of each paycheck of the 75 million workers without employer pensions into an individual retirement account administered by a private financial institution. Workers could opt out of the program, but the default option — if the worker does nothing— would place the employee on a path to better retirement saving.
The proposal is essentially costless to businesses since the saving contribution would be directly withdrawn from workers' paychecks. Firms would receive a small tax credit to offset any administrative costs.
This approach is novel because it doesn't change the incentives to save — the tax benefits for IRAs remain the same. Instead, it just greases the wheels on retirement saving. Workers who didn't save before because they were overwhelmed by the paperwork of creating an IRA, or felt intimidated by investment decisions, would now be automatically enrolled in an account unless they choose not to participate.
The automatic enrollment concept succeeded remarkably well when applied to employer-sponsored 401(k)s. One research paper found that automatically enrolling employees in an employer pension more than doubled the participation rate for new hires, especially for lower-income and minority workers — groups that traditionally have lower rates of saving. In this way, the tax benefits of retirement saving, frequently realized by higher-income workers, would now be more evenly distributed.
Tax policy is fraught with tough choices, but this proposal isn't one of them. McCain supports it. Obama endorses it. Bi-partisan bills establishing the Auto IRA have been introduced in both the House and Senate. Let's hope that with an ally in the White House, Congress gives this plan due consideration and puts millions of workers automatically on track to better saving.