Tuesday, October 30, 2007

Growing the Nanny State

One of the things I like about the Wall Street Journal is that, unlike most mainstream newspapers, it actually does provide opposing points of view. The other day they ran a piece by Rep. Charles Rangel defending his trillion dollar tax hike idea. Today, they ran this piece on saving for retirement.

The first thing I noticed about this article was that, despite it's title, it was written by a Clintonista. Hmm, I thought, what could a Bubba-lover have to say about fiscal restraint and self-reliance.

Surprise, surprise -- as it turns out -- nothing.

Some No-Brainer Savings Ideas

October 30, 2007; Page A18

The recent mortgage-loan crisis has exposed the dark side of predatory lending practices. But it may also help bring to light a potentially larger issue: Not only are Americans making poor choices when it comes to loan deals, but too many Americans are making poor choices -- or no choices at all -- to prepare financially for retirement. [yes, unfortunately that's all too true.]

The average Social Security benefit is about $11,000 a year. It is meant to supplement retirement, not fund it altogether, yet half of all families have no other savings in retirement accounts. People who do set money aside are not putting away nearly enough; half report savings of less than $25,000. [Yikes, what are these people planning on doing when they retire?]

There are many reasons why household savings are so low, but sheer inertia plays a role. Many Americans simply don't make the choices needed to prepare for retirement. Those who do take the time to consider their choices find the decisions too complex -- and complexity translates into nonparticipation and poor financial decision making. [Do you catch her drift? It's ok -- I didn't either when I read this. But this is the transition point of the article. The story line is being developed that "many Americans" are too stupid or too lazy to plan their own retirements. So, somebody's got to do it for them. Any guesses as to who that might be?]

There is a way to harness the power of inertia: the Automatic 401(k), in which workers are enrolled by default in a 401(k), unless they opt out. One year after the Pension Protection Act of 2006 helped smooth the way by clarifying some of the laws, the evidence shows that Automatic 401(k) is working. According to a survey of 350 employers nationwide by Wells Fargo & Co., 44% reported using automatic enrollment; and according to a survey of 1,000 401(k) and profit-sharing plans by the Profit-Sharing Council of America, 39% of employers automatically increased the contribution rate for employees in 2006 -- more than twice the number previously. [Wow, I'm shocked -- it's the government! Gee, since people aren't able to take accountability for their retirement, we need the government to do it for them. I guess it's too much to expect people to be responsible for themselves, and why should we bother educating them; no, the solution is more government!]

What does automatic enrollment mean for employees? The Retirement Security Project, launched by the Pew Charitable Trusts, estimates that a 23-year-old male professional will save an additional $200,000 through automatic 401(k) enrollment and escalation by age 67 -- enough to fund an additional four years of retirement. [Hey, I've got an idea. What's a government program without a government bureaucracy to administer it? We need another government agency. How about the Department of Retirement Security. That has a nice ring to it.]

The success of automatic enrollment in 401(k)s has policy makers looking for other ways to utilize the same "default" approach to help employees increase their contribution level gradually over time, invest prudently, and preserve their retirement benefits through rollovers at the time of job change.

To help the 75 million workers who don't have access to an employer-sponsored 401(k), a bipartisan group of legislators -- led by Sens.Jeff Bingaman (D., N.M.) and Gordon Smith (R., Ore.) and Reps. Phil English (R., Pa.) and Richard Neal (D., Mass.), have introduced a bill to create an Automatic IRA. This would be a standard IRA account, but funded through payroll deductions. It would also offer automatic 401(k)-like features such as an automatic investment choice, level of contribution and enrollment. Under the proposal, employers with 10 or more employees that have been in business for at least two years would enable employees to save their own money in an IRA by using the employer's payroll system.

The Automatic IRA allows employers to facilitate employee saving without having to sponsor a formal, ERISA-regulated retirement plan, or make matching contributions. Firms would receive a temporary tax credit to offset any initial administrative costs; either the employer or the employee could choose which financial institution would hold the money. The Retirement Security Project estimates that the Automatic IRA could increase IRA participation rates significantly from the current rate of one in 10, and could ultimately increase net national savings by nearly $8 billion annually.

The next step is to use the same automatic mechanisms to enable workers to have the security of a guaranteed lifetime retirement income with annuity-like products. Employees could either have annuities built into their retirement savings programs, perhaps by directing the employer match into them, or be strongly encouraged to convert all or a part of their savings upon retirement. [What a great liberal. She hasn't even gotten her government program off the ground yet, but she already has grandiose plans to enlarge it.]

A conversion of savings into annuities could be phased in over time, or it could be accomplished on a trial basis that the retiree could reverse if he or she chose, or it could be in the form of "longevity insurance" that does not begin until say age 85 or so. The key is to make the process as easy and seamless as possible. [Think back to the 30s or 40s when they started Social Security. I can just hear them saying the same things: "It'll be a small program phased in over time. They can reverse it if they choose. The key will be to make contributions as easy and seamless as possible through payroll deductions. Of course contributions will have to be mandatory, but we can call it something innocuous, like "longevity insurance", which will make it more palatable.]

We have learned through hard experience that financial education, although important, is not enough. It has to be accompanied with procedures making it easier for workers to make appropriate decisions. Just as the Automatic 401(k) and Automatic IRA would help to ensure that employees have enough retirement savings, automatic guaranteed lifetime income would help to ensure that they do not outlive their savings.

Ms. Tyson is a professor of business and public policy at, and former dean of, the Haas School of Business of the University of California, Berkeley. She served as chair of the Council of Economic Advisers under President Clinton.

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