How to get people saving in America again? Obamacare for retirement accounts.


The personal savings rate: Stabilizing, but still bad. (FRED)

Here's an accepted fact: Retirement is broken for most Americans.

The traditional defined-benefit pension plan has all but disappeared, leaving most with just a 401(k) plan through their employer -- and only half the country has those at all. Since people stay in jobs for much shorter periods, they end up with pots of money stashed in different places, unless they have the capital and financial savvy to manage their own private account.

So we should find some better way to nudge people to save on their own, right? Well, encouraging homeownership is one way to do that; it's a forced payment you have to make every month towards a concrete thing that you can borrow against or liquidate down the line. But it's also risky, and maybe you can't or don't want to buy property. So, maybe there are ways to get landlords to make saving easier for their tenants instead.

There's a more simple idea, though: Just roll them all into one gigantic savings plan. That's it, one step, no hassle, done.

A couple of weeks ago, Connecticut took a big step towards doing that, by mandating a study to assess how private sector employees could automatically be added to a retirement savings plan administered by the state, unless they intentionally de-enroll. Studies strongly suggest that participation rates increase when programs are opt-out rather than opt-in, so this could have a dramatic effect on those who've never set up accounts at all. And by creating a big pool, it allows the state to take very low management fees, which can be an obstacle to doing it on your own.

Sound familiar? The concept is kind of like the Affordable Care Act, or at least its state-level predecessor in Massachusetts, which is supposed to achieve cost savings and cover a lot more people by asking everyone to join in.

Connecticut isn't the first state to think about this. Many have tossed around the idea, encouraged by groups like unions, AARP and the Working Families Party. But several have foundered in the face of fierce opposition from the financial industry, which fears the loss of the fees it charges to manage people's money, since the state doesn't intend to make a profit from administering the fund.

"It's kind of like, as an organization, we're kind of unsympathetic to it," says Lindsay Farrell, executive director of Connecticut's Working Families Party, which fought for the bill. (In addition, she points out, most of these lower-income people wouldn't be buying private retirement accounts anyway.)

At this point, a few plans survive: California is in the study phase of a plan similar to Connecticut's, and Illinois' state Senate just passed a bill along to its House. And there's a reason they're coming up through the states. The White House is thinking about how to help people save for retirement, but the most it could do was propose the MyRA program, which is opt-in rather than opt-out, and only takes up to $15,000 before rolling over into a private IRA or 401(k). Doing this kind of thing nationally would require congressional action -- which has been proposed several times, with little movement -- and is probably a non-starter while employers are still grappling with Obamacare.

Retirement security wonks tend to like the automatic savings idea, but they're worried the ones in the works might suffer from a giant design flaw. Both California and Connecticut's plans guarantee that the saver will never lose money. In order to offer that guarantee, they have to buy insurance from a private firm, which could increase investment fees to about a third of the value of contributions.

"I want to emphasize that the guarantee could torpedo the whole program," says Ben Harris, policy director of the Hamilton Project at the Brookings Institution. "I would never save in a retirement program where one out of every three dollars goes towards a contract."

The silly thing about the guarantee, Harris says, is that it's trying to hedge against a risk that retirement savings accounts basically admit doesn't exist: Saving for retirement is an inherently long-term play, and if you choose investments that basically track the market, like conservative mutual funds and index funds, you won't lose money over in the end anyway. (Farrell, of the Working Families Party, says she doesn't think insurance will increase the cost that much.)

Despite being in the works for a while, Obamacare for retirement is still quite a way from reality, even in the states where it's gained traction. If one eventually pulls it off, the model could spread fast. If they bungle it, the idea might die in its cradle.

"It seems like the states will have one shot," Harris says.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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