Guest Editorial

The President's Savings Proposal (Again) Too Little and Almost Too Late

By Jane White, President of the Retirement Solutions LLC and a former financial journalist. She can be reached via email at Jane@retirement-solutions.us. The Retirement Solutions LLC is a non-partisan organization dedicated to educating the public about saving for retirement.

Here are three telling examples of why Bush's proposal doesn't close the retirement gap:

• Americans aren't saving at work. The median 401k balance for individuals between the ages of 45 and 54 is less than $25,000. Four in 10 401k participants have less than $10,000 in their accounts.
• Americans aren't saving at home. In 1974, the year Congress created the Individual Retirement Account, Americans saved nearly 10% of their paychecks. Thirty years later, household debt has exploded to 100% of disposable income; meaning the average American has a net worth of zero.
• Pension coverage isn't increasing. Despite four legislative efforts since 1978 to expand pension coverage, half of Americans aren't covered by a retirement plan. Among small businesses with fewer than 100 employees fewer than 4 in 10 companies offer a plan.

Since the 'carrots' of tax incentives aren't sufficient to change employer and employee behavior, it's time to use some sticks,

First strategy: Boost contribution rates at work

Require that employers tell each employee the percentage of salary (contribution rate) that those of us wait need to sock away to reach adequate retirement savings.

Permit all Americans, not just people over age 50, to make unlimited "catch-up contributions." Households should be able to sock away bonuses, inheritances or a second salary and reap the benefits of tax deferred growth as long as the money isn't tapped until age 59-1/2. Sorry, Democrats, you're going to have to find other ways besides taxes on savings to raise revenues.

Second strategy: Increase Coverage

Require all employers with more than 50 employees to offer a 401k plan. Sure, small businesses are a major engine of economic growth in America and they need all the breaks they deserve. On the other hand, a small employer who has been successful enough to afford salaries for 50 people should be able to afford to foot the administrative bill for their "deferred compensation" program.

Require all employers with fewer than 50 employees who don't offer a retirement plan to disclose this fact to prospective employees, along with the fact that this lack could be "hazardous to their retirement wealth." This disclosure would cause a sequence of positive outcomes: the prospective employees would look for work elsewhere, the "rejected" employers would start shopping for coverage and the 401k service providers would make it more cost-effective for small companies to offer a plan.

Third Strategy: Prohibit participants who change jobs from "cashing out" before age 59 1/2

The only thing more self-destructive than not saving enough is consuming your savings. Unfortunately, according to a study by Hewitt Associates, nearly half of all workers who changed jobs in 2002 "cashed out" their savings rather than rolling the savings over into their new employers' plans or an IRA. Currently these withdrawals are heavily taxed, so the "stick" approach of punishing bad behavior isn't working. The better strategy would be to prohibit withdrawals outright-- the same way participants in a defined benefit pension aren't allowed to tap into a vested benefit until they reach age 65. Sorry, Democrats, you're going to have to find other ways besides taxes and penalties on savings to raise revenues.

America has correctly rejected the European welfare state pension scheme in which current retirees are supported by current workers. On the other hand, we in the United States are enmeshed in bipartisan denial: Republicans who delude themselves with tax cut carrots and Democrats who denounce tax incentives and like tax penalties but otherwise don't have any meaningful reforms. (From all appearances, retirement adequacy is still not on the radar screen of any of the Democratic Presidential candidates.)

This election year would be a vital opportunity to seriously address the retirement crisis. What's more, if we don't act now and instead wait until the baby boomers start retiring in seven years, the crisis won't be expensive. It will be unsolvable.

This editorial is dedicated to Michael S. Gordon, Retirement Solutions LLC board vice president, who died Feb. 1. An architect of the Employee Retirement Income Security Act, he will be sorely missed by the pension reform community.

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