About half of all private sector workers do not have access to an employer retirement plan. Those employees must rely solely on Social Security and private savings for retirement. Many workers, though, lack the initiative, foresight, or adequate funds to plan ahead and save for retirement.
Recently, federal and state leaders have proposed a variety of solutions intended to address the need for greater retirement security. On the federal level, President Obama and Senator Tom Harkin, the Chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, have proposed government-sponsored savings plan. Obama presented his idea for “MyRAs” in his February State of the Union Address; MyRA would allow employees to make after-tax contributions towards a tax-sheltered retirement savings account, similar to a RothIRA. Senator Harkin introduced a bill that would create a type of social insurance in which employees place a contribution into a pooled fund. At retirement, the employee would receive an annuity or monthly payments for the rest of his or her life. And last week, Senator Marco Rubio proposed that employees without an employer-sponsored savings plan become eligible to enroll in the Thrift Savings Plan offered to federal workers.
State leaders have been making similar proposals based on the work of the National Conference on Public Employee Retirement Systems (NCPERS). NCPERS proposed a “pension” plan for private workers in 2011. The NCPERS plan is modeled after a defined benefit cash balance plan and would provide employees with a lifetime annuity at retirement.
Government-sponsored retirement plans could solve a couple of problems. To begin with, each of these proposals would address, in their own way, the issue of mobility and whether a worker leaving his or her job could take the accrued retirement savings. Workers today are increasingly mobile and need plans that they can carry with them. Yet traditional state pension plans do not transfer into the private sector or across state lines. On the other hand, while 401k plans are theoretically portable, employees often forget about previous accounts or incur costly “leakage” penalties when they withdraw funds for non-retirement purposes after switching jobs. A state-based retirement savings plan would address some of these issues, but only the federal options would truly address the mobility and leakage problems. Another proposal that has been made and may address these issues is to expand Social Security, an already portable program that also avoids leakage.
The Harkin and NCPERS plans also propose using a multiple employer plan model, an “untapped market” according to Pensions and Investments. Pooled employer plans mean that costs and risk can be more evenly distributed. Multiple employer plans lessen administrative costs, spread the actuarial risk of plan funding, and better shield beneficiaries from market volatility. The plans would be overseen by independent trustees and professional money managers. Harkin’s plan would also include an oversight role for the Department of Labor.
In all cases, these proposals are intended to be an additional, not primary, stream of retirement income for workers. While not a panacea, government-sponsored plans could provide a low-cost savings vehicle for more workers to save for their retirement.