A System That Needs to Be Retired

Like many others, Ghilarducci points out how backward it is to design a retirement system in which the incentives to save are biggest for the highest-income individuals. Because contributions are tax-deferred, the tax break is biggest for those high earners.

Ghilarducci proposes replacing it with what she calls guaranteed retirement accounts. Participation accounts would be mandatory except for workers covered by traditional defined-benefit pensions. All other workers would be required to put aside 5 percent of earnings (although employers could contribute a portion of the amount, if they choose), until they hit the same earnings cap as for Social Security, which is $98,000. Setting aside money before it gets into workers' hands to help provide for retirement is something that occurs in both the Social Security system and traditional pensions.

To help ease the burden on workers, every employee would receive a $600 refundable tax credit. The credit would be paid for by eliminating the tax break for 401(k)s and other plans. As a result of the change, tax filers with $75,000 or less in annual income would have higher after-tax income than under the current system, and that accounts for 87.8 percent of tax filers.

The money would be invested in financial markets by professionals, such as the board that manages retirement savings accounts for federal workers, and would receive a guaranteed rate of return of 3 percent per year, adjusted for inflation. The 3 percent rate is based on real economic growth since World War II "because long-term financial returns should at least keep pace with long-term economic growth," Ghilarducci wrote.

What I like about Ghilarducci's proposal is its boldness -- the idea that it is better to create a new model than to keep retrofitting a system that presents unacceptable risk for so many workers. Even though defined-contribution plans are being improved, the changes will come too late for some and will be of no use to the vast universe of workers who do not participate in retirement savings plans, many of whom work for small businesses or for themselves.

She concedes that it might be tough politically because it would mean somewhat higher taxes for rich people. She is also up against the retirement-industrial complex -- all the businesses that have evolved to design retirement savings plans, to administer them, to sell mutual funds to participants and to provide investment advice to plan participants.

But changing the system could be helpful to more than just individuals, she argues in her book. The economy will lose an important stabilizer if people's ability to retire depends on the health of financial markets. "When older workers cannot leave the workforce . . . and cannot afford retirement during bad economic times, unemployment will get worse," she writes.

Join Martha M. Hamilton and Joel Dickson of Vanguard for an online chat on Tuesday at noon at washingtonpost.com. She can be reached athamiltonmartha@washpost.com.