Retirement Plans—After the Fall
When it comes to retirement savings, the recent stock market collapse has surely focused the mind. For years, we embraced the lovely, but ultimately absurd, idea that double-digit returns on equity investments would continue forever. Now, retirees-in-waiting must get their arms around a market that lost half of its value between June, 2008 and March of this year.
In this gut-wrenching environment, how should we think about retirement savings? Harvard law professor Dan Halperin, a visiting scholar at TPC, has a provocative solution: He’d dump all tax-advantaged employer-based retirement savings plans and use the money—nearly $100 billion in 2009– to enhance Social Security.
It is not that Dan has a philosophical objection to employer plans, it is just that after working with the tax provisions for 46 years, he's concluded they don’t work very well.
Ideally, these plans should be universal. But, Dan argues that if employers must contribute to their workers' retirement, they will cut their pay—a trade-off that may not be in the best interest of low-income employees. Similarly, while the tax benefits of retirement plans are terrific for high-bracket workers, they’re not much good for low-wage colleagues who don’t pay income taxes. Congress could increase their after-tax benefits, of course, by creating a refundable credit. President Obama has proposed such an incentive. But if Congress chose to pay for this new incentive by reducing after-tax benefits for those earning higher-incomes (many of whom are the bosses), some companies would respond by killing their retirement savings programs.
Then, there is the issue of investment returns. For a long time, Dan notes, low-income workers were told they were investing too conservatively—too much cash, not enough stocks. I haven't heard that complaint for a while. But what is the right investment mix?
Could policymakers design a plan that protects against downside risk? Sure, but it would require workers to give up some upside reward. Let’s see, a mandatory retirement program that promises modest returns in exchange for low risk. That sounds a lot like Social Security, especially for lower-earners.
Thus, Dan concludes, let’s ditch the menagerie of employer plans that nobody understands anyway. You know the litany–401(k)s, 403(b)s, 457s, SEPs, SIMPLEs, etc, etc. Instead, he says, fix Social Security and get on with it.
Dan described his plan at an Urban Institute lunch today, but you can look at an earlier version he presented at a joint TPC-UCLA conference in January.
His idea is nothing if not provocative. But after cruising these treacherous waters for nearly a half-century, Dan has the right to rock the retirement boat.