Your Money 

Pushing Aside 401(k)’s for Mandatory Savings Plans

Retiring

By MARK MILLER    DEC. 11, 2015

Tony James and Teresa Ghilarducci are unlikely allies. He is president of Blackstone, the giant private equity firm; she’s a labor economist who has long advocated replacing 401(k)’s with a universal, federally managed saving plan.

But the two have teamed up to push what they are calling Guaranteed Retirement Accounts, a government-sponsored plan that would require participation and contributions from any employer without its own 401(k). They both view the 401(k) defined contribution retirement system as a faulty experiment that covers too few workers, generates inadequate savings and replaces too little income in retirement.

“There’s really no alternative,” Mr. James argues. “It needs to be mandated.”

Maybe so, but the notion of employer mandates has become anathema to Republicans in Congress since enactment of the Affordable Care Act in 2010, which requires employers above a certain size to provide health insurance for their workers. The bitter political battle over the health law killed any prospect for the White House’s mandatory retirement savings proposal — the auto-IRA — which was first proposed in 2009.

“Anything that was a requirement for employers, and especially smaller employers, became incredibly toxic and politically charged,” said David John, senior strategic policy adviser at AARP, the lobbying organization for older Americans.

But the Ghilarducci-James alliance is just one sign that the prospect of a future mandatory retirement system is not dead.

The Obama administration introduced myRA accounts in November, offering a federally sponsored voluntary starter retirement account featuring payroll deduction, no fees, conservative investments and a guaranteed rate of return.

Illinois, California, Oregon and other states are pushing to create their own mandatory plans. They received a green light to move forward when the Labor Department, which oversees retirement plans, recently proposed rules that would shield employers offering them from having to conform to the stringent rules of the Employee Retirement Income Security Act of 1974.“After seven or eight states create their own plans, there will be critical mass for something national,” predicted Brian Graff, chief executive of the American Retirement Association, a trade group. “Financial services companies and employers will be frustrated with all the different state rules — they’ll ask Congress for a national program.”

Ms. Ghilarducci, a professor at the New School for Social Research in New York, agreed. “The states that are passing their own employer mandates all prefer a federal plan,” she said. “There’s a practical case to be made for it.”

The case rests on the fact that as most private employers have abandoned traditional pensions and replaced them with self-financed retirement accounts (usually with some sort of employer matching contribution), many Americans are not saving enough to ensure a comfortable retirement.

Experts say employees should aim to replace 70 to 80 percent of their salary or wages in retirement. Social Security covers just 39 percent for the typical worker retiring at 65, according to the Center for Retirement Research at Boston College.

The retirement center calculates that a worker who starts saving at age 25 needs to set aside and invest 10 percent of her income annually to hit a 70 percent replacement target. Roughly half of working age households are falling short, many by a wide margin.

“More middle class workers will be at risk of downward mobility and poverty in old age than their grandparents and parents,” Ms. Ghilarducci said.

What would a mandatory universal savings plan look like in the United States? Programs introduced in other countries offer some insight. Australia has had a mandatory program since 1992; Britain and New Zealand both have had programs for less than a decade.

All three were begun in response to concerns about low savings rates and inadequate coverage from existing systems. Worries about rising longevity and the sustainability of traditional old-age public pension programs — similar to the Social Security system in the United States — also played a role.

Australia’s program initially required all employers to contribute 3 percent of workers’ pay to defined contribution accounts; over the years, the required employer contributions have been increased to 9.5 percent and are scheduled to rise further, to 12 percent in 2025. Employees are encouraged to make additional contributions.

Last year, the average accumulation for men at retirement age was equivalent to about $170,000 in U.S. dollars, according to estimates by the Association of Superannuation Funds of Australia, an industry trade group. For women, it was $90,000.

The mandatory defined contribution programs in Britain was created in 2012, by the Conservative government. Employers and workers covered by the plan each contribute 1 percent of pay; those rates will rise to 3 percent for employers and 5 percent for workers in 2018.

Currently, the system has enrolled 5 million workers — about half of the country’s uncovered population.

New Zealand’s government-sponsored KiwiSaver program, introduced in 2007, auto-enrolls workers when they start a new job. Existing employees and self-employed can join voluntarily. New enrollees initially contribute either 4 or 8 percent of their gross income; until this year they received a $1,000 government contribution as a kickstarter incentive.

What are the results? Projections by the Organization for Economic Cooperation and Development, the official research arm for most developed nations, show that a young person entering the Australian work force this year who is paid an average income can expect a net income replacement rate of 58 percent at retirement. In Britain the comparable figure is 71 percent; in New Zealand 57 percent for those workers maximizing their contributions.

The projected impact on low-income retirees is even more impressive. The O.E.C.D. expects all three countries will replace nearly 100 percent of income for low earners.

The mandatory savings programs in Australia, Britain and New Zealand all supplement public pensions, but those programs have been reshaped to reduce projected future expense.

“Australia is well-prepared for the demographic crunch that is coming as people live longer and birthrates decline,” said Nick Sherry, a former government minister who played a crucial role in the program’s creation.

In the United States, Ms. Ghilarducci would build on Social Security, which is currently financed through a 12.4 percent payroll tax split equally between employers and employees — a sort of mandatory saving program in its own right.

The Guaranteed Retirement Account adds to the payroll tax with a pretax contribution of five percent of pay split between workers and employers, up to the cap on Social Security earnings (currently $118,500).

Workers would receive a refundable $600 tax credit to offset the cost of contributions — a credit that would replace the current tax breaks on 401(k) contributions. Investments would be managed in a pool, with a guaranteed 2 percent annual return, and converted into a lifetime annuity at retirement.

Mandated savings programs are opposed by some segments of the financial services industry. Trade groups representing life insurance companies and stockbrokers argue that financial education and behavioral change will produce better results.

“We don’t believe an employer mandate is going to move the needle,” said Lisa Bleier, managing director and associate general counsel at the Securities Industry and Financial Markets Association.

Mandatory savings also are viewed with trepidation by some progressive policy advocates. They would prefer to expand Social Security and worry that a political deal to create a mandatory savings plan could be coupled with higher retirement ages and other Social Security benefit cuts.

“The first, best solution is to expand Social Security,” said Nancy Altman, president of Social Security Works, an advocacy group. “As long as expanding Social Security is the first step, improving employer-based supplemental retirement plans is a reasonable second step.”

The White House is on record as supporting a mandatory saving plan, albeit a more modest one than the guaranteed account idea. And Mr. James says he is optimistic that Republican support can be found in the future.

“I think we can sell it because it’s not a tax,” he said. “The G.O.P. does like the idea of people taking responsibility for themselves and not relying on the government.”

A version of this article appears in print on December 12, 2015, on page B4 of the New York edition with the headline: Pushing Aside 401(k)’s for Mandatory Savings Plans.

© 2015 The New York Times Company