Teresa Ghilarducci has both a “new” proposal and a new collaborator and—I hope you’re sitting down—I actually agree with her.
Well, partly anyway.[i]
Her new proposal is—as a recent op-ed in the Washington Post puts it—“Everyone should have the retirement plan federal employees enjoy.” Specifically, the federal government’s Thrift Savings Plan, or TSP. And while it’s positioned here as some kind of exclusive government benefit, it’s (just) a workplace retirement plan federal workers contribute to—just like your 401(k)—a plan in which that the government, as the employer/sponsor of the plan, matches those employee contributions.
Prof. Ghilarducci—and her new co-author, Dr. Kevin Hassett[ii]—point out—as we have—that there is a coverage gap in the current system—that, sadly, millions of Americans (still) lack access to a retirement plan at work.
Her solution,[iii] as the op-ed title suggests, is to build a TSP-like program for—well, everybody—or at least presumably those who don’t already have a retirement savings plan at work. The short (18 page) paper is light on particulars, but does take the time to do the math on just how much this could all add up to, assuming situations both with (and without) a match, as well as various return scenarios (3% and 7%). It also speaks briefly to the cost of such a program (there’s an assumption of a government matching contribution)—$60 billion in tax year 2021 (assuming that the take up rates match existing Congressional Budget Office estimates, with that government match capped at 3% for individuals making up to median household earnings of around $52,000–$100 billion “should the policy match rise to 5%.”
This, the authors point out, shouldn’t necessarily be a concern,[iv] considering the low interest rate the government currently owes on such borrowings (we’ll set aside for the moment the reality as to who actually owes that low interest), but more significantly perhaps that, “When that hypothetical 25-year-old starts to take her $600,000 out of her TSP account when she retires, she will pay tax on the withdrawal, as well.” Hold that thought.
Indeed, reading the proposal one would think the notion of matching contributions and automatic enrollment had not only been pioneered by the TSP, but that it was the only place on the planet where such innovative structures could be found. Incredibly, Economic Innovation Group (EIG) CEO John Lettieri—the public policy group under whose auspices the proposal was published—notes that, “if you give low-income workers access to a well-designed retirement plan, they will participate. If we didn’t have TSP, we couldn’t say that.”
Don’t get me wrong—the TSP is a fine program, much appreciated[v] (and rightly so) by the workers who participate in, and benefit from, it. That said, while the success it has enjoyed in participation and contributions is laudable—it’s not really beyond the experience of most 401(k)s in the private sector. In fact, we’ve pointed out repeatedly data that shows that even modest income ($30k-$50k/year) workers are roughly 12 times more likely to save if they have a retirement plan at work than those who don’t. Indeed, the TSP experience mirrors the long-time experience of plans in the private sector that have also taken those steps. And it was far from the first program to adopt those measures.
It is therefore odd that this particular proposal claims that “…those most in need of building wealth are implicitly excluded by current savings incentives.” A sentiment echoed by coverage of the proposal in an article on cbs.com titled, “401(k) plans favor rich people. Here’s how to change that.” Doubling down on that theme, the proposal states as fact that “…the current system simply wasn’t designed to maximize and reward participation among those most in need of building wealth,” and that “…federal policy relies on tax deductions that overwhelmingly skew towards more affluent workers, and are useless to most low-income workers who pay little or no federal income tax to begin with.”
The myopia in the logic here is that the proposal’s authors apparently see everything through the prism of taxes, as though that was the only motivation, and as though there were no limits/boundaries on the business owners that establish these plans. Of course, we all know there is more than just tax incentives at work here—those non-discrimination rules mean that employees who are not “highly compensated” may nonetheless get significant employer contributions (even sometimes when they are not contributing on their own behalf). Those contributions don’t show up on their W-2s, or in the “analysis” of the tax benefits of these programs, but they are essential elements in retirement security, particularly for lower income workers.
Those non-discrimination tests—indeed the contribution limits imposed on more highly compensated workers—not only foster the level, the very existence, of those employer contributions, but also work to ensure that a certain balance is maintained between the contributions made by the non-highly compensated and the contributions allowed to the highly compensated. All of which, as was noted earlier in the context of that hypothetical 25-year-old, are tax deferred, not tax avoided.
Now that brings us back to the coverage gap. Odds are if you’re reading this, you’re devoting your day, and likely your career, to helping American workers save for retirement—and not only encouraging employers to provide the means to do so (some of you are those employers), but continuing to advocate for and implement positive change. We’ve all heard, read—and perhaps said ourselves—the reasons put forth for not offering workers a retirement plan. Some can’t afford (or don’t think they can), some perhaps don’t see the need, others simply haven’t been asked to (yes, that’s a reason given)—and others, perhaps many others—have no idea how to start.
So, despite the reality that several hundred thousand employers have figured out how to do this, to the extent Prof. Ghilarducci and Dr. Hassett are promoting expanded access to more workers, I’m on board. As noted earlier, data has long shown that even modest income ($30k-$50k/year) workers are roughly 12 times more likely to save if they have access to a retirement plan at work than if they don’t—and there’s no reason to think the group who currently lack this access—given a convenient opportunity to do so through payroll deduction—won’t.
Yes, I’m all for an approach that would give all working Americans access to a well-run, cost-effective retirement plan through work, including one supported by government matches (as the Saver’s Credit currently, albeit somewhat awkwardly, tries to do), alongside the current incentives for both workers and business owners.
As for the notion at least implied by this proposal—that this would be best accomplished via a centralized plan/pool run by the federal government…
[i] Prof. Ghilarducci has been a long and consistent advocate for her Guaranteed Retirement Accounts (GRA), which are targeted at lower income individuals, funded by minimum contributions by both workers and employers, as well as a government “match”—invested in massive collective pool—a program she has proposed paying for by taking away the current tax incentives for plans like the 401(k). While in its current format this proposal lacks some of the more pernicious elements of that design, it overlaps just enough for one to wonder if it’s simply a Trojan Horse for something… else.
[ii] Hassett is Vice President and Managing Director of The Lindsey Group and the former Chair of the White House Council of Economic Advisers—whose conservative credentials burnish the notion that this is a “bipartisan” proposal.
[iii] This kind of proposal isn’t completely without precedent. You may recall that back in 2014 Sen. Marco Rubio (R-Fl) suggested that the TSP be opened to American workers who did not have access to an employer-sponsored plan.
[iv] Unlike her previous proposals, there’s no talk here (yet) of taking away the current pre-tax status of current 401(k)s to pay for it. And, if operated like the TSP, it would presumably maintain both the individual account structure, and the opportunity to bequeath the remainder to heirs, should that be desired.