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.
Retirement Philippines
Retirement to me means relaxing and enjoying life and what better way than in a tropical environment. Retirement Philippines can be exceptionally hot and humid but don’t forget that you can now afford to retire in the Philippines, by the beach with the cool sea air blowing into your face or you can afford air conditioning.
There are a few improvements possible. One is to make employers a bit more careful about finding low cost money managers by mandating that fees be paid up front by the employer rather than taken from program earnings. Individual workers do not have the resources to find the lowest cost provider – employers quickly would and would have the bargaining power of a large account.
The debate on Social Security Personal Accounts was, sadly short-circuited – largely because the Democrats and the UAW used it as an electoral issue rather than showing any willingess to deal. The emergence of the Enron situation also poisoned the well on probably the best option – diverting funds toward the purchase of employer voting stock. Had that situation been settled on in 2002, or even earlier in 1982, the market would not have collapsed in 2008 because there would be no market. Employee-owned firms in the U.S. would have likely had major union participation and would have adopted the European practice of offering mortgages to members, which would have prevented the need to lower mortgage rates in 2002 to keep the housing market going, effectively preventing the housing bubble. It would certainly have stopped liar loans from happening to the extent it occurred.
There is the possible criticism that employee ownership is unsafe, however if a third of the contributions to such a fund were made to a mutual fund that holds the stock to all such firms, that fund could pay off in the event of failure. Additionally, such a fund would be non-market – so it could be managed at a much lower cost than anything operated by Wall Street – and with no commissions.
The last provision is why such a proposal was never taken seriously. The drive toward Social Security Personal Accounts invested in index funds would have been a bonaza for Wall Street – and would have deepended the collapse we are experiencing today, rather than averting it.
If Dan proposes denying tax exclusions for future contributions to 401k's and such, that's a discussion worth entertaining. If he's proposing current taxation of investment returns from past contributions, that's quite a different proposal. Which is it?
If the government were to take the latter approach, I would expect a rush to spend retirement accounts before the government could confiscate even more of the assets. We really don't need such policy instability.