It won't happen any time soon -- we have too many pressing economic problems -- but down the road, after the 2010 Congressional election, look for citizens and policymakers to start clamoring about improving the current 401(k) retirement-savings system.
Most investors are aware of 401(k)s, the contribution plan that comprises the bulk of private retirement savings. These plans no longer look so attractive in an economic environment that's unlikely to repeat the Roaring '20s (or even the Roaring '90s) in the decade ahead.
Over the past 30 years, to cut costs, most corporations eliminated employee pensions, or defined-benefit plans, and instead offered employees defined-contribution plans. Defined-contribution plans generally are not intrinsically less costly than defined-benefit plans; the main difference is that they allow employers to shift investment, actuarial, and administrative costs to the employees. Yet due to their portability -- and to generally bullish stock market conditions since 1981 -- 401(k) plans soared in popularity.
401(k) system: Helpful but flawed
That ended last year, when the overleveraged equity bubble burst. For many Americans, the triad that once formed that foundation of retirement income -- savings, Social Security, and IRAs and 401(k)s -- now looks weaker. And as 401(k) fortunes declined precipitously -- "My 401(k) is so small now, it's become a 201(k)," went one rueful joke -- the system's weaknesses were revealed: that employers weren't always matching employee contributions, or even offering them at all -- and that employees not contributing enough to them.
Further, a 401(k) hinges a great deal on the health of a particular company. Pinning such a large component of personal retirement income hinge on a company's decisions is hardly a solid foundation for a sound retirement system in an industrialized democracy.
The solution to the morass: A system that encourages those without 401(k)s to contribute and save more money for their retirement.
From here, I'd argue that a good way for the U.S. to encourage personal retirement savings is to create a unique retirement account. I'll call it the 701(k). In addition to using pretax-dollar contributions, a 701(k) account would get a 20 percent match (or equivalent federal tax credit) from the U.S. government on the first $5,000 of annual citizen contributions, and a 10 percent match for larger contributions, up to $10,000.
But I envision a 701(k) as helping lower income and working class taxpayers save more for retirement. Under my plan, the 701(k) and match would be available fully to individuals earning less than $60,000, or couples earning less than $70,000; anyone earning more than that would get a reduced tax shelter and reduced government match on a sliding-scale, means-tested basis.
Maybe the 701(k) could even start as a private-public partnership. Imagine if a philanthropist like Warren Buffett or Bill Gates, or Mike Bloomberg's Charitable Trust, donated $10 billion to fund the government's 701(k) match.
But the central point is that the 701(k) would be a need and income based, private sector-oriented system. Lower income and working class Americans have modest means; investment incentives like the 701(k) would help provide incentives for more people to save for their golden years. And in the process, the U.S. will avoid the large social costs that will surely appear in a decade or so, if tens of millions of Americans hit 65 with too little in their private retirement accounts.
Financial Editor Joseph Lazzaro is based in New York.
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