Matt Yglesias

Budget Includes Automatic Retirement Benefits for non-401(k) Workers

I’m on a conference call with Peter Orszag who’s mentioning an element of the budget that thus far hasn’t gotten any attention—the administration’s desire to expand automatic retirement savings to workers whose employers don’t offer 401(k) plans. Long story short, it would require such employers to set up an automatic payroll deduction IRA for all their employees. Employees who looked at the situation and decided they would rather save less would be free to opt-out. But the default option would be to opt-in, and the evidence suggests strongly that flipping the default in this way will substantially increase the savings rate. A smallish thing, but a great idea.

Third Way’s First 100 Days: Retirement Security Edition

As we’ve clarified, speaking as ever purely for myself and not as an institutional position of CAP/AF, Third Way’s First 100 Days agenda strikes me as pretty weak tea. For starter’s here’s their retirement security agenda:

Rebuild retirement wealth

• Federal 401(k) match. Provide federal matching funds to 401(k) and IRA contributions, up to $1,000 per worker per year.

• Temporary tax exemption for 401(k) withdrawals. Provide a temporary exemption from federal income taxes for the first $15,000 in 401(k) withdrawals for seniors who are withdrawing from their accounts.
• Streamlined consolidation of 401(k) accounts. Nearly half of all workers who switch jobs cash out their 401(k)s. Create a streamlined, automatic roll-over process for workers with multiple 401(k) accounts or who are switching jobs to avoid the problem of “cash out.”
• Federal 401(k) contribution insurance. For most workers today, a 401(k) account is the centerpiece of their retirement security and savings. Yet
  workers approaching retirement are unprotected from having their investments decimated by market shocks. Create an entity modeled after the Federal Deposit Insurance Corporation that would protect the principal contributed to workers’ 401(k) accounts until a worker retires.

The consolidations thing seems like a fine idea, although “create a streamlined, automatic roll-over process” is more of a placeholder than an actual policy. And I’m not sure I fully understand the 401(k) insurance proposal — how could it be modeled on the FDIC? 401(k)s don’t, as far as I’m aware, suffer from “runs” in the same way that bank deposits do. And a guarantee of this sort seems like it could create a substantial moral hazard problem in a way that’s not really true of bank deposits. It’s conceivable that this is a good idea, though, but you’d want to know more details — details that don’t seem to be available.

Federal matching funds for 401(k) and IRA contributions seems like a pretty ill-considered idea. In the short run, if this succeeded in boosting short-term savings rates it would have a contractionary impact on the economy and make things worse. In the long run, the idea of federal matches to boost savings has some merit, but this is an odd way of implementing it. In particular, it would be pretty regressive — an additional subsidy for families already sufficiently well-off to be saving money that does nothing for the economically struggling. CAP has, by contrast, proposed a Universal 401(k) approach that seeks to target aid to the neediest (for whom Third Way would do nothing) while not extending additional help to the wealthiest Americans.

Company Men

CBO Director Peter Orszag reports on very poor decision-making about Americans’ retirement portfolios:

Despite those risks (again, for which workers don’t receive higher expected returns on their investments, on average), a significant number of 401(k) participants hold the bulk of their assets in company stock. According to calculations by the Employee Benefits Research Institute, 47 percent of 401(k) participants were enrolled in plans that offered company stock as an option as of the end of 2006. Of those participants, 7.3 percent held more than 90 percent of their assets in company stock, and over 15 percent held over half their assets in company stock. (See page 33 of EBRI Issue Brief 308, “401(k) Asset Allocation, Account Balances, and Loan Activity in 2006.”) At yesterday’s hearing, I didn’t make clear that the 7.3 percent figure applied only to those who were in plans offering company stock. So the overall share of 401(k) participants with 90 percent or more of their assets invested in company stock is more like .47*7.3=3.4 percent. It’s still too high.

And to be clear, 3.4 percent is too high because the correct proportion of 401(k) participants with 90 percent or more of their assets invested in company stock is zero. Nobody with any choice in the matter should be nearly that heavily invested in any one company. And under normal circumstances, it’s especially pernicious to be heavily invested in the company you work for. That means that if your stock goes bust, it’s probably a situation where you’re likely to lose your job as well.

The only places I’ve ever worked for have been either privately held firms (The Atlantic) or non-profits (TAP, CAP) so I haven’t personally experienced this problem, but I’m told that at a lot of firms there’s substantial informal and semi-formal social pressure to be heavily invested in the employing firm. Maybe not so many people go as far as 90 percent, but 90 percent is absurdly too high anyway. You’d do a lot of good for a lot of people if you found a way to break that habit.

Happy Birthday Social Security

It was 73 years ago today that President Franklin Roosevelt signed the legislation establishing the Social Security program. For each and every one of those 73 years, Social Security has been a pay-as-you-go public pension scheme in which the current generation of workers’ taxes go to pay benefits to present retirees and, in exchange, future generations of workers will pay for current workers when they retire. It’s been effective at meetings its goals and broadly popular: