Dean Baker: State-run retirement plan would aid workers
The vast majority of Americans who expect to retire in the next decade can count on little income other than their Social Security. This is true not only for low-income workers, who have struggled most of their lives, but also for millions of middle-income workers. Although Social Security is a tremendously important program, and provides a solid base that retirees can depend upon, its $16,000 average annual benefit doesn’t go very far. Many, if not most, can expect to see sharp reductions in living standards.
The reason for such bleak retirement prospects is the disappearance of traditional defined benefit pensions and the failure of 401(k)-type plans to fill the gap. A recent analysis by the Employee Benefit Research Institute found that, in 2011, only 14 percent of private-sector employees participated in a defined benefit pension plan. The participation rate has been falling quite rapidly, so it was almost certainly lower in 2015.
Although many people were hopeful that 401(k)s would be sufficient to support a comfortable day-to-day retirement, this has proved not to be the case. In 2013, the middle fifth of households of people ages 45 to 54 had less than $60,000 in total financial assets. And most homeowners in this age group still had less than 40 percent equity in their homes, meaning they could look forward to paying off a mortgage well into their retirement.
In response to this situation, Illinois is developing a state-run retirement program that will make it easier and cheaper for workers to save. Many other states, including California, are studying this option.
Although there are differences in proposals, the common goal is to create a publicly managed system that will automatically include workers whose employers do not enroll them in a plan.
Workers would have a modest amount (around 2 percent to 3 percent) deducted from each paycheck, although they could opt out if they chose. The money would then accumulate like a 401(k) during a person’s working years, with the option to receive a lump sum or draw a monthly payment at retirement. There are four main advantages to this idea.
It’s increasingly obvious that there’s a major hole in the retirement system, and that the government can help fill it. That’s why President Barack Obama asked the Treasury Department to set up a new low-cost, low-maintenance savings plan for workers – called myRA for “my retirement account.” But the myRA limits are low and participants can only invest in low-yielding government bonds. What Illinois and, perhaps soon, other states, propose to try is more ambitious, and may ultimately be more effective.
Dean Baker, co-author of “Getting Back to Full Employment: A Better Bargain for Working People,” wrote this for the Los Angeles Times.