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Thursday, September 13, 2007

"Supplementing Social Security"

Rahm Emanuel has a proposal to increase personal savings:

Supplementing Social Security, by Rahm Emanuel, Commentary, WSJ: ...In the past two years, America's personal savings rate reached its lowest level since the Great Depression. And in comparison to other industrialized countries, the United States ranked second to last in personal savings.

Most people intuitively understand the importance of saving as a way to finance education or a dignified retirement, but the benefits to the overall economy are also important. An increase in savings enlarges the pool of capital...

Every American who works ought to have the chance to save. But today ... nearly half the work force ... lack[s] access to an employer-sponsored savings plan ... for retirement. At the same time, too many who have access to a savings plan contribute too little or don't participate... In addition, Americans don't start saving early enough. ...

Over the past 30 years, we have offered a blizzard of tax initiatives to encourage individuals to save for their retirement. .... Yet the national savings rate has plummeted. ...

In the last Congress, I proposed legislation that took a different approach. Instead of offering a new tax subsidy, my proposal helped companies automatically enroll employees in their 401(k) plans, rather than relying on workers to fill out the forms necessary to participate in a plan. ... If we make saving simple by limiting the amount of time, effort and decisions that people have to make, we can dramatically increase the number of people who save. In short, simplicity trumps choice.

Making saving easy is half the battle. The next step is to make saving universal. ... Republicans have long advanced the idea of personal accounts inside of Social Security. An accounts-based system that supplements, not supplants, Social Security can work. Democrats have argued that 401(k)s and personal savings are important supplements to Social Security, but we should ensure that fees are low and that lower-income Americans have the same opportunity to save that upper-income Americans enjoy. ...

I believe we should create Universal Savings Accounts. Like 401(k)s, the accounts would supplement Social Security. Employers and employees would contribute 1% of paychecks on a tax-deductible basis. Additional contributions could be made to the accounts at the discretion of the company or individual worker.

To ensure low management fees, these accounts would be managed by the private sector but overseen by a quasi-public board that would be given fiduciary responsibility for the types of investment options that workers could select. This system is used by the successful federal 401(k) program, or Thrift Savings Plan, where ... fees have averaged 30 cents for every $1,000 invested. By comparison, the typical mutual fund charges $15.50 per $1,000 invested. ...

To help achieve universal participation and simplicity, employers would automatically enroll their employees in these accounts, allowing employees to opt out if they ... did not want to participate. ... Since low-income workers have the hardest time saving for retirement, we should provide ... a federal tax credit that matches savings put into retirement accounts.

I believe that this type of approach ... is a necessary pre-condition to reforming Social Security. ... American people like the security that comes with Social Security. In order for us to tackle the problems of Social Security, Washington must provide solutions that make the American people feel more financially secure. If this anxiety is not addressed first, neither party will be given the opportunity to constructively address the challenges facing Social Security.

My approach protects the sanctity of the Social Security... It also expands individual savings opportunities outside of Social Security... Strengthening Social Security for the long term will take a sustained commitment to fiscal discipline and bipartisanship, commodities that can become scarce as we head into the presidential election season. But while Americans wait for long-term answers on Social Security, we should act now to give them more ways to start building retirement savings of their own.

I doubt this has much of a chance of going anywhere. I have no objection to the proposal, though the motivation used to sell the program - the implication that Social Security is headed for disaster if something isn't done - is overwrought. I also believe that these types of programs can easily turn from "add-ons" to "carve-outs" down the road which undermines their attractiveness, and I don't think these programs will increase savings as much as people predict once they become widespread and opting out is as simple as checking a box on a computer screen the first time finances get tight.

[Update: Andrew Samwick: A New Approach on Social Security Reform?]

    Posted by on Thursday, September 13, 2007 at 03:24 AM in Economics, Policy, Saving, Social Insurance | Permalink  TrackBack (0)  Comments (14)

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