Can the U.S. government require you to get an IRA?

One of the biggest priorities for the Middle Class Task Force led by Vice President Biden is a push to improve and standardize American retirement planning. This is where the Obama administration can make big changes. But whether average workers or financial service firms and insurance companies will be the chief beneficiaries remains to be seen.

Make no mistake, something needs to be done about the state of retirement planning in this country. Because 401(k)s have largely replaced traditional pensions, the financial state of our collective golden years has become precarious. First, not all companies offer retirement plans. Those that do often make them available only to full-time or salaried employees. Workers further down the income ladder are left out of the loop by design or by their decision; if they can barely make ends meet, they're not going to voluntarily sock away a chunk of their paycheck. In addition, retirement benefit plans are complicated, offering myriad choices that sometimes freeze would-be participants into inertia.

According to the Center for Retirement Research at Boston College, 51 percent of households won't be able to maintain their standard of living after retirement. Even before the financial crisis struck, it was a worrisome 43 percent.

The president's plan is to make retirement contributions opt-out: The default will be for employers to enroll their employees in Automatic IRA, the cornerstone of the Retirement Security Project developed by David John of the Heritage Foundation along with Mark Iwry, a former Brookings Institution scholar who decamped to the Treasury Department last year. All but companies with 10 or fewer employees would be required to participate, which John estimates will increase the number of Americans with retirement-plan access to 89 percent from about 50 percent today.

The idea of more or less requiring Americans to do the right thing isn't a new one, and it's no surprise to see it coming from this administration. Cass Sunstein, Obama's appointee to head the Office of Information and Regulatory Affairs, gained notoriety for his co-authorship of "Nudge." The book uses the psychology of human behavior to argue that lawmakers have an obligation to craft policies that shepherd people toward a desired outcome.

Retirement Security Project developers envision private-sector administration of automatic IRAs, with a small number -- perhaps as few as three -- target-date investment options offered, based on index funds to keep risk and overhead low. Initially, a worker just starting out would have his or her money invested in an "accumulation account" until it reached $5,000. The project calls for the creation of a special type of bond, called an R-bond, to house these embryonic nest eggs. Upon hitting the $5,000 threshold, the money would roll over into a target-date fund unless the worker specified otherwise. If the amount never reached that $5,000 threshold -- say, if the person left the workforce to start a family and never returned -- the money would be treated as it would in any other inactive IRA account.

A second facet of this nationwide retirement plan is an improvement in the credit offered to low- and moderate-income workers who invest pretax dollars into a retirement plan. The previous credit was nonrefundable, meaning that if a worker made too little to itemize or pay income tax, he or she got nothing. Now the government will offer a 50 percent match for the first $1,000 in employee retirement contributions every year as long as the family's annual pay stays under $65,000. (Above that, it's gradually phased out for incomes up to $85,000.)

The final plank of this platform is a push for workers to convert their retirement investments into annuities. Unlike a traditional pension, 401(k) contributions are available at retirement as a lump sum or in the form of monthly payments for a fixed period of time. Either option comes with the danger that the money can run out before the beneficiary dies, a danger brought into sharp relief when the drop in the stock market eviscerated many Americans' nest eggs. According to a survey by Prudential Financial of more than 1,000 employees, 65 percent of those ages 45 to 64 said they plan to delay retirement because they cannot afford to stop working.

Annuities are a good alternative in theory, but implementing a nationwide plan for their use raises a lot of logistical and regulatory questions. First, they're an infamously complex type of investment, and buyers have to take what's essentially a gamble that they won't be hit by a bus before they have made back the money they paid.

The bigger problem is that annuities are, technically, a form of life insurance. They're not sold by banks or brokerage firms; they're sold by companies such as American International Group. Because insurance is regulated only at the state level, there's nothing like an insurance version of the FDIC that protects bank deposits. The states have regulatory agencies and risk pools, but there's no standard -- and no guarantee that a major insolvency wouldn't overwhelm a state program.

One natural solution would be to regulate insurance agencies at the federal level, but that's a political third rail the administration probably won't want to go near.

Some are calling these initiatives another giveaway to the financial sector. The fear that Wall Street will collect some of these funds shouldn't be enough to abandon the idea. America's retirement is a shambles, and the problem is only going to get worse once baby boomers start retiring in droves.

Martha C. White is a freelance writer in New York.