A Bipartisan Fix for Retirees
In the aftermath of their November election victory, Democratic leaders have pledged to work on a bipartisan basis to solve the problems facing our nation. In that spirit, I suggest that Democrats and Republicans can successfully work together to create personal savings accounts for all Americans outside the Social Security system, an idea that politicians from both political parties have supported for years and that The Post's editorial page recently endorsed ["Up From the Depths," editorial, Nov. 27].
For the first time since the Great Depression, our country's savings rate has fallen into negative territory, with more than half of all American workers having less than $25,000 in savings excluding their primary residence. More troubling, almost half of the 152.7 million Americans who worked in 2004 worked for an employer that did not sponsor any retirement plan, and an additional 17.3 million did not participate in the plans their employers did have. Furthermore, the average American worker has held nine jobs by age 35, meaning that he often leaves his job before his retirement benefits become vested and that he will probably cash out whatever limited employer-sponsored retirement savings he has when he changes jobs.
The solution for this problem is to create a national system of personal savings accounts modeled on the successful Thrift Savings Plan (TSP) for federal employees. Federal employees pay Social Security taxes and receive the same Social Security benefits as everyone else. But the TSP program allows them to invest a portion of each paycheck -- along with a government match for part of these contributions -- in one of six investment accounts (or some combination of these accounts), including a government securities fund and a common stock fund. Over the past two decades, this system has been an unqualified success, as federal employees have received large returns on the money they invested.
Under legislation I will be introducing in the next Congress, an individual personal retirement account -- called a PLUS Account (for Portable, Lifelong Universal Savings Accounts) -- would be established for every American at birth and would be endowed with a $1,000 contribution from the federal government. This money could be placed in a limited number of investment funds similar to those offered by the TSP program, with the parents of each newborn choosing their preferred funds. Parents and grandparents also would be allowed to contribute up to $5,000 annually to these accounts. Without any additional contributions, and given a reasonable rate of return, the initial $1,000 endowment would be worth $50,000 to $100,000 when each individual reached age 65.
But the real impact of PLUS accounts would be that, beginning in 2009, 1 percent of every worker's paycheck would be automatically deposited into his own account for the first $100,000 earned annually, with his employer required to match this 1 percent contribution. Worker contributions would be made pretax while employer contributions would be tax-deductible. Both workers and their employers would have the option of contributing more.
Funds contributed to PLUS accounts would be the legal property of each account holder, but they could not be touched until age 65. Any funds remaining when an individual died could be passed on to a spouse, children, grandchildren or anyone of the holder's choosing (including a favorite charity). Account assets would be protected from creditors and would not be considered in determining eligibility for any federally funded benefits or in calculating estate tax liability. Finally, my plan would simply serve as a supplement to the Social Security system, not altering the program in any way.
If we begin PLUS accounts at birth and require a portion of every paycheck to be invested, the average American citizen could retire with a rather sizable nest egg. For instance, given a 6.59 percent rate of return (the same rate as the TSP's most conservative fund since 1987), someone who makes $46,000 a year -- the median household income in 2005 -- and contributes 1 percent of each paycheck would retire with almost $300,000. If that same individual were to contribute 3 percent over the course of his working life, he could expect to retire with over a half-million dollars (even if his employer never contributed more than 1 percent).
The continued success of the U.S. economy depends on increasing savings for every citizen to provide the investment capital we need to ensure long-term economic growth. More important, without increased savings, most Americans will not have sufficient money upon retirement to live the comfortable life they deserve after 40-plus years of work. As all honest policymakers in Washington are aware, Social Security alone cannot sustain the lifestyle retirees want and can have, especially as 78 million baby boomers begin to retire.
Our nation's saving rate is a big problem. It requires a big solution. We cannot tinker with the federal tax code and expect personal savings to increase dramatically. By harnessing the power of compound interest through individual savings accounts and small paycheck deductions, we can ensure that almost every American will retire a half-millionaire.
The writer is a Republican senator from Alabama and a member of the Health, Education, Labor and Pensions Committee.