By James Kwak
Floyd Norris says some sensible things in his column from last week on the retirement savings problem: Defined benefit pensions are dying out, killed by tighter accounting rules and the stock market crashes of the 2000s. Many Americans have no retirement savings plan (other than Social Security). And the plans that they do have tend to be 401(k) plans that impose fees, market risk, and usually a whole host of other risks on participants.
But even his cautious optimism about some new policy proposals is too optimistic. One is the MyRA announced by President Obama a couple of weeks ago. This is basically a government-administered, no-fee Roth IRA that is invested in a basket of Treasury notes and bonds, effectively providing low returns at close to zero risk. The other is a proposal by Senator Tom Harkin to create privately-managed, multi-employer pension plans that employers could opt into. The multi-employer structure would reduce the risk that employees would lose their pension benefits if their employer went bankrupt.
These are steps in the right direction, but modest ones. The underlying problem with private sector defined benefit plans is that the employee takes on counterparty risk, where the employer is the counterparty. In this case, the pension plan is insulated from the risk that a company will fail, which is an improvement, but not from the risk that the plan itself will fail due to a market downturn (of the kind we have recently seen). There is language about allowing the plan to reduce benefits in such a scenario, but this of course undermines the benefit of a defined benefit pension in the first place.
The underlying problem with individual retirement savings vehicles (in addition to all the usual problems like fees, bad investment choices, leakage, etc.) is that many people just don’t make enough money to save for retirement. In this country we like to think of the ability to save as some kind of moral virtue, but in reality it’s primarily a function of your income. There is no comparison between saving 10 percent of a $250,000 annual income and 10 percent of a $15,000 annual income. What’s more, the MyRA caps out at $15,000, after which point you’re on your own in the Wild West of asset management
MyRAs could get people in the retirement savings habit, which is useful if they start making upper-middle incomes, but not enough if they are stuck in the lower middle class. At the end of the day, the only way to ensure some degree of decent retirement income for low earners is to have a partially redistributive pension system (or a much higher minimum wage), and the only way to avoid the solvency risks of defined benefit plans is to have a federal government guarantee. (It should be no surprise that Social Security has both.) MyRAs and Harkin’s plan can help at the margins, but they won’t solve those fundamental problems.