On October 30, 2015, the Schwartz Center for Economic Policy Analysis (SCEPA) co-hosted a conference with the Center for American Progress on How Tax Reform Can Address the Incoming Retirement Crisis. We discussed the erosion of American's retirement security and how the tax code can be used to encourage retirement savings.

Retirement tax expenditures are the second largest federal tax expenditure, costing roughly $100 billion per year and growing. They are ineffective and regressive. Rather than encourage savings, they incentivize the well-off to shift their savings to tax-exempt accounts. The top 20% of earners reap 60% of the benefits of these expenditures, while the bottom 40% of earners see only 3%.

In light of the crisis in retirement savings--one quarter of workers aged 50-64 have no retirement savings whatsoever--we believe this money could be put to better use. If it were converted to a credit and divided evenly among the population, it could provide over $600 per year to Guaranteed Retirement Accounts. Add to that state retirement tax expenditures, and you can make an impact in the retirement security of low-income and middle-class Americans.

The AtlanticDemocrats, Hillary Clinton included, often state they are committed to ensuring Social Security will continue to support its most vulnerable recipients. In fact, this notion is the basis of a current Republican plan currently. Representative Paul Ryan (R-WI), chairman of the House Ways and Means Committee, proposed a plan to reduce benefits for the wealthiest 70% of recipients, purportedly to ensure that benefits remain unchanged for the poorest 30%. In my Atlantic article, “Why It's Misleading to Swear to Protect the Poor's Social Security Benefits” I explain why this would damage political support for the program and could result in its demise. Put simply, when a majority of Americans find they are paying the same for a program that they will get less from, they will be increasingly disinclined to support it.

A similar analysis can be applied to the proposal to raise the salary cap for contributions to Social Security. As it stands, Social Security taxes are only drawn from the first $118,500 of income. Raising that cap will force high earners to pay more without getting any additional benefits. This also could damage the program’s political support. Nonetheless, raising the salary cap is a good way to improve the solvency of the system. It should be part of a comprehensive approach to strengthening and expanding Social Security for everyone.

Blackstone President Tony James today announced his support for a Retirement Savings Plan at the Center for American Progress (CAP) event, "Creating Long-Term Value." The Retirement Savings Plan seconds my call for creating Guaranteed Retirement Accounts (GRAs).  James' statement (in full below) was covered by Pensions and Investments and CNBC

"The theme of today's conference is short termism. While America can deal with short term crises pretty well sometimes, when it comes to intractable long-term problems, we are hopelessly short-sighted.

So I want to talk today about a huge, looming problem that almost no one is focused on. There may be no bigger challenge today than fixing our broken retirement system. The problem isn't with current retirees or people my age who are nearing retirement. It is with people in their 20s and 30s. Most of these young people no longer have access to pension plans and have to depend exclusively on personal savings and anemic 401ks. All at a time when they are struggling with years of stagnant incomes in real terms and have student loans to pay off. As a result, they are increasingly dependent solely on social security. But Social Security will not provide enough income for people to maintain their standard of living in retirement. And it is not just an issue for low and middle income workers. Inadequate savings and retirement worries are shared by many who are thought of as having high incomes but stop short of being rich. In other words, it cuts across society. If we don't do something about it, when an entire generation – maybe two generations - retires at 65 and doesn't have enough to live on, we are going to say "Oh my God, what happened?"

The good news is, we can solve this problem. And we can do so relatively painlessly, with manageable burdens on everyone. But we have to start now. If we let this problem linger, it will tear a hole in our social fabric. 30% of Americans will not have enough savings to maintain their standard of living and 15-20 million additional retirees will be poor or near poor - poverty rates not seen since the Great Depression. And our aging demographics mean the burden will fall crushingly on a shrinking group of young workers.

I believe we need to take our current Social Security system as a given and build on that. But Social Security alone is not enough. Most experts advise targeting a 70-80% replacement rate in retirement to have adequate income. Social Security provides 40 points of that, so retirees need to accumulate another 35% from other savings. The problem is most Americans cannot, have not and will not save that much. The average balance of retirement savings in America today of people between 40 and 55 is only $14,500. For people 55-65, the median balance is only about $80,000. For a person in their mid-60s, that would provide income of only about $2000 per year for the rest of their life. They really need 6 or 7 times this amount of income and underlying savings!

Roughly 15% of workers today, mostly government employees, are fortunate to have a defined benefit pension plan. Even with the chronic underfunding of state pension plans, beneficiaries are generally in good shape. Of the remaining people working in the private sector, about 60% have access to a corporate sponsored 401k plan.

But up to one-half of employees don't take full advantage of these plans. In addition, they contribute too little, withdraw funds too early, and earn sub-par investment returns on their savings. The cumulative effect of these problems is that 401k plans can't work as a foundation for retirement. Still, 401k participants are better positioned than the other 40% of private sector workers that have no retirement plan at all. In short, our current system is a hodge podge of inconsistent programs that are simply not capable of providing basic retirement security for the American people.

I'd like to offer a fundamentally different approach, which I have had the pleasure of working on with labor economist Teresa Ghilarducci. I call it the Retirement Savings Plan. Under the Retirement Savings Plan, everyone who works without a pension plan, no matter how little or how much they make, from Uber drivers to CEOs, would have their own Guaranteed Retirement Account. We would simplify our current patchwork system by rolling everything else into it, 401k, IRAs, Keogh plans, etc. How can we make this happen? There is really no alternative. It has to be mandated. I know that can be a politically loaded word these days, but I assure you that nothing short of a mandate will provide future generations of Americans enough income for a secure retirement.

The Retirement Savings Plan will. Social Security represents a savings of about 12.5% of an average worker's income. To get retirement safety we need them to save another 3% each year - if it is invested correctly and earns a return for the retiree. (Unlike Social Security, which of course is not actually funded.) This is a much smaller gap to fill than most people assume. To make this 3% savings contribution affordable, I propose it be split evenly between workers and their employers. 1.5% each. Right now, the government spends $100 billion per year by allowing deductions of retirement contributions. This hasn't helped the retirement crisis at all. Because it is a deduction against income, it only benefits the most affluent Americans who already have enough retirement savings, and it is unavailable to the poorest who desperately need the help. Instead, I want to take that same money and give every individual worker, rich or poor, a government tax credit equal to their retirement contribution, up to a maximum of $600 per worker per year. The net effect on the government deficit is zero. $600 will fully defray the cost for people earning up to $40k per year. For a medium income family earning $45k, the annual cost of the plan would be only $75 per year. And their money isn't going anywhere. It is safely in their own retirement account and they will benefit tremendously in the long run.

For employers, the 1.5% of wages will be offset, to a greater or lesser degree, by their no longer having to contribute to and bear the administrative costs of 401k or other retirement plans. Their obligation to contribute (and the employee's) would be capped (as in Social Security) at 1.5% of only the first 250k of compensation for high earning employees.
With corporate profits at an all-time high in relation to GDP, this should be a manageable burden, and it will forestall the need for higher corporate taxes down the road.

Now that we have established and funded the Guaranteed Retirement Accounts, we come to the next critical component of the Retirement Savings Plan. The capital in people's Guaranteed Retirement Accounts must work harder. It has to be invested well in pooled plans run by professional investment managers and earn a solid return, just like pension plans do. The structure of today's 401k plans makes this impossible. They are required by law to be invested in ways that force excess liquidity, with short-term investment horizons and lots of volatility. Beneficiaries are supposed to choose from a narrow selection of managers and don't have the expertise to do so. And the administrative costs are high.

Where defined benefit plans expect to earn 7-8% annual returns, 401k accounts typically earn only 3-4%. For a 25 year old who puts aside $1000 per year, that's the difference between $75,000 and $200,000 when she retires at age 65! Managing the Guaranteed Retirement Accounts in a pooled fashion is good for a few reasons. First, when you pool your investments, you can leverage that scale to pay lower fees. You'll also have access to highest quality, private sector asset managers who would compete with each other to get you the best return. These investment strategists would be able to adopt long-term investment horizons that are actually appropriate for retirement funding. They could invest in less liquid, higher return asset classes, like Alternatives – real estate, managed futures, commodities, and the like. The beauty of investing more effectively is that the higher return funds a big part of the retirement gap and doesn't cost anyone anything! To the contrary, it encourages long-term capital formation and longer investment horizons which benefits the whole economy by fueling growth and getting away from short-termism in the markets.

In addition, I propose that the Federal government guarantee a minimum annual return of 2% for all retirees on their Guaranteed Retirement Accounts. This would eliminate the risk of market volatility for people unlucky enough to retire at the wrong time and give people confidence in contributing to their retirement accounts. Better yet, it can be essentially costless for the government because the accounts are extremely likely to earn comfortably more than the 2% guarantee over the long term.

The third leg to the stool is helping people make the right choices with the accumulated GRA balance when they retire and, perhaps more important, helping them avoid the tendency to do the wrong thing. People are living longer and retiring earlier. They have a lot more years in retirement. Since 1950 the average years in retirement has increased by five years, from 14 to 19 years. This means that retirement savings have to last for longer than ever. Most people aren't able to plan for that because they don't have the expertise to invest and annuitize it properly. And since no one knows how long they will live, we're essentially rolling the dice and hoping our retirement savings last long enough. But with GRAs, there's a clear way to fix that, too. When someone retires, their accumulated savings would be automatically annuitized as part of the overall pool and they would get a guaranteed amount every year for the rest of their life. A pooled system makes this possible, because you don't just pool your savings – you pool your risk of running out. In this case, we're essentially insuring against outliving our retirement savings. Few of us will live to 110. But those of us who do should be able to count on a continuous standard of living for their whole lives – instead of worrying, right up to the end, that we might not have enough. Making these annuity payments and tracking the GRA balances and inflows would be done through the existing Social Security infrastructure. No new government agencies or apparatus are required. It should be a relatively simple add-on to what is being done already. And with more assets under administration, costs per person should actually decrease.

Finally, I think we should help give older Americans the choice and the incentive to work longer, if they so desire. Accumulating more savings by working longer and shortening the retirement period has powerful effects on financial security for retirees. And for many, working longer has health and emotional benefits. We could facilitate this by making Medicare the primary health coverage for anyone over 65, even if they are still working. Medicare would pay this anyway if they retired, so incremental cost to the government should not be significant. That way, employers who pay health insurance will get a large break on their insurance cost for every employee past Medicare age. Instead of paying about $25,000 for an older worker's health insurance costs, the employer would pay something around $3000 or $4000 for a Medicare supplement. That's a significant incentive for them to keep older employees on the payroll longer. As for the employee, I would give them an incentive by doubling the credit for Social Security and GRA contributions they make in any year worked over the age of 65.

We know a system like this can work – because we've seen it work all over the world. Broadly similar plans have been adopted in countries like Australia and Chile – and every time they've been implemented, they've worked as promised. In fact, they haven't just provided retirement security, they've helped drive overall economic growth and significant capital formation. These steps will allow millions of individuals to have a stronger, more stable retirement. And that's not just good for retirees. It's good for their families, our communities, and our nation's economy as a whole. Achieving retirement security is going to require us to look beyond the next election cycle – beyond the next fiscal quarter – and toward the stronger nation that we can build together."

In “When it Comes to Retirement Savings Most Workers Are on Their Own” I discuss the limited availability of employer-sponsored retirement plans, and workers’ bias toward sticking with their employer’s default contribution rate.

Retirement plans’ default contribution rates have a large impact on workers’ retirement savings because workers tend to stick with what they’re offered. The most common default rate is 3%, but more and more employers are going above and beyond. The Wall Street Journal reported that 39% of employers offer a default rate of 4%, up from 27% ten years ago.

This trend is welcome. However, positive developments in employer-sponsored retirement accounts are only available to the 41% of American workers who have access to them. People without access to retirement savings accounts at work are unlikely to save for retirement on their own. Thus a large number of American workers have no retirement savings whatsoever. Even workers on the verge of retirement have, on average, nowhere near enough savings to retire.

America’s retirement system and access to quality retirement savings vehicles are not robust. We should enact Guaranteed Retirement Accounts to ensure all Americans can enjoy a comfortable and dignified retirement.

In “The Recession Hurt Americans' Retirement Accounts More Than Anybody Knew” I take on the conventional wisdom that retirement balances that fell sharply in the aftermath of the financial crisis quickly recovered. This story papers over a more complicated and worrying reality.

The familiar story goes like this: after losing $2.4 trillion in the second half of 2008, the nation’s 401(k)s quickly recovered with the S&P 500, which grew 54% in the two years following the recession. Indeed, average retirement account balances among older workers increased by 7% over this period. As it so often does, however, this average belies tremendous variation among individuals.

Roughly 45% of workers age 51-59 saw their retirement balances fall during the 2009-2011 recovery. Once retirement account balances fall, they may never fully recover, especially for older workers. If your account loses 25% of its value, it will have to increase by 33% just to make up the difference.

Our current retirement savings system exposes workers to far too much risk and uncertainty. The solution is Guaranteed Retirement Accounts, which would pool and professionally manage savings, and promise seniors a rate of return so they can choose when to retire.

In “Why It’s Hard to Know How Much Retirement Savings is Enough” I evaluate recent research on optimal retirement savings. The AARP and the Social Security Administration advise people to have at least ten times their annual salary saved by the time they retire. This is a good rule-of-thumb, and most economists endorse it. Recently, however, some have argued that it may be too high. They have the story wrong.

John Karl Scholtz and Ananth Seshardi at the University of Wisconsin say that calculations are biased upward because they fail to account for the costs of raising children. Parents’ financial requirements are much greater when they have children. As soon as their kids grow up, their financial burdens fall. Calculating financial needs as a portion of middle-age income, which must support both parents and children, overestimates what two people really need in retirement.

This is a nice story, but it is unrealistic. On average, parents’ retirement balances increase by only 1% when their children leave home. Exactly why is unclear, but it suggests that Scholz and Seshardi’s story is misleading, and traditional rules-of-thumb for retirement saving are not exaggerated.

In “The AtlanticAt What Age Do Workers Stop Getting Raises” I write about a dismal finding from the New York Federal Reserve. Most Americans’ earnings peak and plateau in their 40’s. After inflation, their take-home pay declines for their final 15-20 working years.

To make matters worse, many American workers actually experience a decrease in earnings in their 50’s and 60’s. Those who switch jobs later in life receive, on average, a 20% pay cut. Only workers at the very top of the income distribution see large and continuous raises until they retire.

Many personal finance experts recommend elderly workers practice restraint and frugality to protect them from poverty as their earnings fall. Since some of their peers will see extraordinary income gains at these ages, they must resist the temptation to “keep up with the Joneses” and spend beyond their means. To me, this sounds a lot like blaming the victim. Small regulatory changes and better public information about debt, earnings, and retirement could reverse the trend of increasing old-age poverty.