About half the private work force participates in a retirement plan; that proportion has changed very little over the past 15 years. Each new offering seems to confuse people as much as encourage them. Many savers are being turned off by the Balkanized landscape of plans today.
Consider: you now have three types of Individual Retirement Accounts (traditional, traditional nondeductible and Roth) to choose from; six plans for small businesses or the self-employed–SEP-IRA, two kinds of SIMPLEs, three kinds of Keoghs–and several employee plans–401(k)s for businesses, 403(b)s for schools and nonprofits and 457s for state and local governments. All have different rules. You can’t necessarily move from one type of plan to another. At retirement, the withdrawal rules can send you to bed with a migraine. For that matter, writing about them does, too.
““It’s an alphabet soup,’’ says Olivia Mitchell of the Pension Research Council in Philadelphia. ““Each of these programs seemed appealing at the time, but each is for a niche group. There’s no clear notion of what our retirement policy should be.''
In a fog: So it’s no thrill to know that when Social Security is repaired, you’ll probably have yet another savings option to decide about. If I were czar, I’d tell Congress to simplify the plans we’ve already got and deposit any new government money into existing types of accounts. But I’m dreaming, of course. Right now, two ““reform’’ trains are steadily chugging down the tracks:
The privatizers. They want to divert a portion of your payroll tax into a personal account that you’d control. Your Social Security benefit would drop, as would any benefit paid to a spouse (or ex-spouse) from your account. Money from some other source (maybe the income-tax surplus?) would help cover the cost of benefits already on the books. You’re hoping that the growth of your private account would cover the indexed government benefits that you’re giving. You might be able to make additional, after-tax contributions to the account.
The overlayers. They want to give you a separate, government-funded account, akin to a national 401(k). President Clinton calls his plan a Universal Savings Account. Workers would receive a modest annual sum (say, $75 or $100). There would also be a government match for part of their own contributions, up to a fixed amount. Sen. William Roth of Delaware backs a Personal Retirement Account, initially lasting just five years. Each year, you’d get a flat payment linked to the size of your Social Security tax.
In effect, these overlays convert taxes into compulsory retirement savings. Low-income workers would pick up a little extra money. There’d be a choice of investments–probably indexed stock or bond mutual funds.
You’d still get a guaranteed Social Security benefit, under either reform. And both camps would use a portion of the budget surplus to lengthen the life of the Social Security trust fund.
But privatizers favor lower benefits (above a minimum guarantee); they prefer personal accounts. Clinton would rather keep most of Social Security intact. To help fund future benefits, he’d try to improve the trust fund’s investment returns by moving 15 percent of the money into indexed, stock-owning mutual funds.
But even under the Clinton plan, Social Security couldn’t stay solvent without some minimal change. Benefits might have to be cut–say, by putting off the year when you can start receiving retirement checks. Payroll taxes might be applied to a higher level of earnings (this year, you’re taxed on the first $72,600).
We don’t yet know exactly how these proposals are likely to change your life. There will be winners and losers, compared with Social Security as we know it now. But no one wants to mention the losers until a bipartisan plan can be hammered out. As Gene Sperling, the president’s economic-policy aide, so carefully says, ““The details have to be negotiated.''
For inquiring minds, the Employee Benefit Research Institute tested a partially privatized Social Security system, with 5 percent of your payroll tax diverted into a private account. EBRI assumed that young people put most of their money into stocks, and that older people leaned toward bonds. It also included the cost of supporting people already on the rolls. Surprise, surprise. After 40 years, most people alive today would get lower real benefits than traditional Social Security pays. It’s costly to keep the current plan, but you need to know that private accounts are no free lunch.
What’s true of the privatized plans applies to Clinton’s plan, too. The gains in your separate account might not make up for any benefit cuts. There are practical problems, too. Who will administer these accounts, especially for the people receiving $100 or less a year? What happens if the budget surplus shrinks?
New niche: Meanwhile, on the pension front, Roth has proposed two new niche accounts–Roth 401(k)s and Roth 403(b)s. They’d be just as opaque and complex as the Roth IRAs, which were introduced last year (and which haven’t been a success so far).
I’m more persuaded by Roth’s idea of reviving the universal IRA–a tax-deductible, tax-deferred plan that anyone could use. Maybe it could be one, simple vessel, open to contributions from workers, employers and the government, too. Maybe there could be two investment tracks–one with plenty of choice for people with large sums of money, one with two low-cost choices (stock fund or bond fund) for small accounts. If this couldn’t be done with IRAs, maybe the universal vessel could be Roth’s Personal Retirement Account. ““I see nothing wrong with that,’’ Roth says.
People can be paralyzed by too many choices. Make it simple, sweetie, and watch the savings pile up.
