Teresa Ghilarducci, a labor economist and professor at the
New School for Social Research, is not inclined to exert
herself in supporting the interests of the affluent. If
anything, its the reverse.
In How to Retire with Enough Money: And How to Know What
Enough Is, her book coming out December 15 from Workman
Publishing Co., Ghilarducci recommends using tax credits,
rather than tax deductions, to reward people for retirement
saving. Her reasoning: Tax deductions are more valuable to
high-income payers. Likewise, she says eliminating the cap on
incomes subject to Social Security withholding, currently
indexed at $118,500, is a desirable way to more fully fund the
Social Security reserves.
Ghilarducci, who is also an adviser to public pension funds,
has portrayed banks and brokers as having armies of
lobbyists that have worked to impede federal adoption of
the Guaranteed Retirement Account (GRA), a type of retirement
account she first proposed in 2007 to replace the 401(k)s and
IRAs that she says have failed in their purpose of enabling
people to fund their own retirement.
Only the last few pages of this slim volume discuss GRAs.
The rest is a basic guide to retirement saving for low- and
middle-income individuals and contains recommendations to delay
taking Social Security benefits until age 70 and other familiar
advice. But its clear that the author regards the GRA as
her primary intellectual contribution to retirement planning
and the best and only likely solution to the retirement
As Ghilarducci describes it, the overall retirement picture
is indeed grim. She points to, among other things, data showing
most Americans over age 50 have only $30,000 in retirement
savings, when $1 million is needed. As things stand, she says,
half of Americans will live in or near poverty after
retirement, with an average food budget of $5 a day.
Her essential point is that the do-it-yourself retirement
savings experiment, which began in 1978 with 401(k)
tax-deferred retirement plans, has failed. People dont
save enough, Ghilarducci says, and they dont invest
wisely enough. They borrow from already inadequately funded
retirement accounts and pay too much in sales commissions and
management fees. She doesnt blame ordinary savers for
this. She notes that retirement planning, although simple in
concept, is difficult in execution.
Her prescription is a nationwide mandatory savings plan.
Every earner would put 2.5 percent of earnings into the plan,
and employers would match these amounts. Funds would be
invested in low-cost index funds selected by private sector
managers chosen by federal officials.
GRA returns would be guaranteed at an inflation-adjusted 3
percent per year, Ghilarducci specifies. Unlike with IRAs and
401(k)s, the money would not be available until retirement,
when retirees would begin receiving inflation-indexed annuity
payments sufficient to allow them to live in comfort without
the fear of running out of money.
GRA would work alongside Social Security. The combination of
12.8 percent in Social Security payroll withholding, including
both employees and employers halves, plus 5 percent
combined contribution to the GRA, would force savers to put
away 17.8 percent. This figure is in the sweet spot of the 15
to 20 percent of earnings considered sufficient for retirement
saving. An elegant solution to our retirement savings
crisis, she writes.
After 40 years of work and contributions, GRA-funded annuity
payments would replace about 30 percent of the typical
retirees preretirement income. As things currently stand,
Social Security supplies approximately 40 percent of
preretirement income for many U.S. retirees. Thus, together,
the two sources would replace 70 percent or so of preretirement
income, a figure often suggested as adequate for comfortable
Ghilarducci doesnt say exactly how enactment of the
GRA would affect current IRAs and 401(k)s, other than to
have the entire financial industry reaching for
antacids. Many people outside financial services object
to the idea, as some dont like the mandatory aspect, she
notes. Others worry about not being able to access funds before
retirement. Many would-be investors are simply uneasy about
handing money to the government.
With those objections in mind, state-level
GRA-like retirement plans have been enacted or are being
considered by some states. California, for instance, in
2012 passed its Secure Choice Retirement Savings Program, which
will operate much like a GRA, though one difference is that
people will be able to opt out of it. The California plan must
meet several requirements before it actually goes into
operation, however. One is determining whether federal income
taxes on contributions can be deferred. Studies on those
questions are under way.
Ghilarducci makes some hard-to-refute points about the
challenges of having individuals responsible for voluntarily
funding their own retirement. She plainly lays out what workers
need to do save more, invest wisely and proposes
a government program that would force them to do just that. The
financial advice is nothing new. The government program has
been proposed before. Meanwhile, a near majority of future
retirees still contemplates eating on $5 a day. How to retire
with enough money remains a puzzle relatively few people have
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