New Year’s is generally a time for fresh starts and new ideas — but that didn’t dissuade Prof. Teresa Ghilarducci from repackaging some old ideas — and some questionable math — in a recent New York Times op-ed.
Ghilarducci’s issue with the current private system are numerous (and well chronicled), but in the Times piece she sums their design flaws as being “individually directed, voluntary and leaky.” She (and her new collaborator Hamilton James, president and chief operating officer of Blackstone, a money management firm) finds “individualized” retirement accounts deficient in that they allow people to withdraw money before they retire (and are thus “restricted” in her view to investments suitable to that purpose, liquid stocks and bonds). Her GRAs, on the other hand, would be overseen by an “independent federal agency,” with workers — and employers — required to contribute a mandatory minimum of 1.5% of their pay (or contract). She’d do away with the current tax deduction for retirement savings, and in its place substitute a $600 refundable tax credit “to pay for the contributions of households below median income.”
To be fair, these points do appear to be a bit of a twist on previous versions of the GRA proposal, which called for mandatory employer and worker contributions of 2.5% each and a $600 matching contribution from the federal government for every worker.
‘Freeing’ Employers
Ghilarducci allows that employers won’t like paying “more,” though she says that her program would “free” them from “administrating and worrying about providing retirement plans if they don’t offer a 401(k) or pension,” and goes so far as to claim that they will also benefit because “…a nation of financially secure retirees would pre-empt higher corporate taxes.” What she doesn’t say is that they might well also choose to be “spared” the financial obligation of all those current matching employer contributions (as would the accounts of current 401(k) participants who receive them).
She solves the investment “problem” of these individualized accounts with “low-fee diversified retirement portfolios” created and overseen by “a board of professionals who would be fiduciaries appointed by the president and Congress and held accountable to investors.” How this would be accomplished isn’t explained, but she claims that “the fees and investments would be much less prone to corruption because the managers’ income would not depend on the investments, the fees would be disclosed, and the accounts separated from government funds and owned by the individuals.” This pooling will allow for the program’s guaranteed return of about 3% to be “essentially costless,” according to Ghilarducci, who admits that that figure is about half the expected return on stocks over the long term.
The Math
However, if the current system, in Ghilarducci’s assessment anyway, falls so far short of what is needed, one might well wonder how in the world that gap could be closed by a 3% mandatory contribution (employer and employee), and a 3% return. While making every worker put something aside would certainly improve the lot of those who currently lack a retirement savings program at work, the vast majority of those who do have access make contributions larger, and receive employer matches much larger, than the levels articulated in the op-ed. Moreover, we all know that a contribution level, even a mandatory contribution level, of 3% is almost certainly going to fall short of the needs of middle and upper-income individuals.[1. Common sense aside, recent research from the nonpartisan Employee Benefit Research Institute (EBRI) draws into question the degree of impact that even a mandatory auto-IRA-type program would have on overall retirement income adequacy.] Ghilarducci admits in the op-ed that, “Three percent is not an adequate saving rate, it is a starting base.” So perhaps that new mandatory contribution level won’t remain at that level for very long.
Nor can it come from the impact of eliminating leakage; previous research by the nonpartisan Employee Benefit Research Institute (EBRI) based on actual administrative data proves that while leakage has an impact on retirement savings, eliminating it would not be “enough.” Granted, by requiring an annuity payout, the GRA purports to offer an outcome that “lasts,” but how could it possibly be “enough”?
No, based on previous iterations of the GRA proposal, this only way the math on this program “works” (and “works” seems a generous description) lies in the pooling of the accounts, euphemistically called “risk sharing” in previous descriptions. The op-ed makes a glancing reference to what this means, noting that the GRA “builds until retirement age, then pays out a supplemental stream of income until that person and his or her beneficiary die.” Said another way, like Social Security, these contributions are mandatory, but if you die “early,” they stay with the pool.
It’s difficult to provide a comprehensive assessment of a complicated proposal that would upend the nation’s current retirement system based on nothing more than an op-ed, but this GRA proposal in large part seems structurally consistent with Ghilarducci’s previous proposals; she basically cuts out the employer and wipes out the pre-tax treatment for 401(k) contributions, while effectively replacing the private system with a federal Social Security supplement that offers a guaranteed (but small) return on those funds, and some kind of notional account in which the individual saver’s interest ends with their (and in more recent proposals their beneficiary’s) death.
If the proposal itself has a certain déjà vu sense to it, what makes it a bit scarier this time is the voice that Ghilarducci is reported to have within the campaign of presidential aspirant Hillary Clinton.
That said, while these GRA accounts might be called “guaranteed,” the only thing that really seems to be worthy of that name is the negative impact it would have on the current system and the retirement security of the savers who are depending on it.
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