Bert Caldwell: More could get chance to save for retirement

Washington residents have enthusiastically embraced a state-sponsored college savings program. In less than a decade, parents have set up 70,000 accounts worth more than $800 million, money that will help future students pay for their education.

Now, AARP Washington and the Seattle-based Economic Opportunity Institute hope to work the same magic with retirement planning. They may have convinced the Legislature to take the first step.

A provision in the state House of Representatives budget authorizes the Department of Retirement Services, which administers the state employee retirement savings programs, to design a proposed Washington Voluntary Retirement Accounts Program.

The department would also work with the Internal Revenue Service to assure the accounts enjoy the tax-free status of Individual Retirement Accounts and 401(k) programs. Almost $450,000 would be set aside for the effort.

Lauren Moughon, advocacy director for AARP Washington, says something must be done to encourage more retirement saving.

Social Security alone falls far short of providing an adequate retirement income, she says. Yet far too few are setting aside money to supplement the government checks.

“We are approaching a massive crisis in savings,” Moughon says.

The evidence is everywhere:

“ A negative savings rate. People are tapping into their home equity to maintain their lifestyle.

“ Only one-half the families with a working adult have a retirement plan.

“ The median balance in 401(k) and other defined-contribution plans is $25,000, enough to buy an annuity that would provide a monthly payment of $128.

And this while U.S. companies like IBM, Coca-Cola Bottling and Verizon freeze or terminate traditional, defined-benefit pension plans, and replace them with 401(k) plans. Many small companies — those with 10-25 employees — cannot afford to offer even that option. Administration costs are just too high.

The Voluntary Accounts would eliminate that burden.

The Department of Retirement Services would administer the plans. Management of the funds might be outsourced to private contractors, but the Washington State Investment Board would review the investment options offered workers to assure they are appropriate.

The state would not be liable for any investment losses, not are the accounts to be considered an entitlement.

Mark Iwry, a senior fellow at the liberal Brookings Institution in Washington, D.C., helped design the program. He says the accounts are not intended to replace options already available from private retirement account managers. The state, by aggregating demand for retirement plans, is simply giving small businesses the economies of scale enjoyed by larger companies.

More than 70 million American workers have no way of saving for retirement at their workplace, he says.

“This initiative is intended to make a dent in the coverage problem,” says Iwry, who was the federal official overseeing all tax-qualified retirement plans during the late 1990s.

DRS Director Sandy Matheson agrees there is a problem and says Voluntary Accounts may give the state the opportunity to help find a solution.

Private employers would be required to make employees aware of the Voluntary Accounts program, and provide for payroll deductions. Although no employer match would be necessary, voluntary contributions would be allowed. If business softened, they could suspend or cancel matches.

The Voluntary Accounts would be owned by the individual, and would be portable as they move from job to job. When they are ready to retire, the accumulated money could be rolled into an IRA.

John Burbank, executive director of the Economic Opportunity Institute, says small contributions begun when just starting a career, can create a sizeable nest egg.

Say a 25-year-old male worker starts at $25,000 a year, and sets aside 3 percent of pay for retirement, with an equal employer match. That’s $1,500 to start. The investment earns 5 percent per year. By increasing the contribution just 1 percent per year, by age 67 that worker would have $228,568 in his retirement fund, even if he was unemployed for a year at ages 35, 45, 55, and 65.

That sum would provide a monthly check of almost $1,600.

In a fiscal note attached to similar legislation two years ago, state officials estimated slightly more than 100,000 employees of 8,000 small employers would enroll in the program. Sadly, that’s less than 25 percent of all those who would be eligible.

Burbank says prior legislatures liked the concept of Voluntary Accounts, but never enough to make them priority as sessions rushed to their conclusion. A $450,000 appropriation would finally get the program started.

Moughon says several other states are also studying the concept, but most are letting Washington take the lead. Fine, but it would be more important if, as the 2005 fiscal note estimated, 8,000 Washington small business owners are prepared to offer Voluntary Accounts.