Harkin's Retirement Plan: The Right Ideas

It's hard to read statistics about how much most Americans have in retirement savings without seeing that this country is heading toward a major social crisis. As a new study by Senator Tom Harkin noted on Friday:

Half of all Americans have less than $10,000 in savings, and nearly half of the oldest Baby Boomers are at risk of not having sufficient retirement resources to pay for basic retirement expenses and healthcare costs.

Yesterday, Thomas Friedman wrote about the social service groups that try to cover the gap when seniors don't have enough money -- and how hopelessly overwhelmed they'll be by the coming tsunami of elderly poverty.

A big source of the problem, as Demos has shown through several studies, is that the 401(k) system has been an abysmal failure. Most people don't save nearly what they need through 401(k)s, and what they do stash away gets eroded by administrative fees and stock market crashes.

Meanwhile, Social Security -- already an all-important bulwark against elderly poverty -- will face growing fiscal pressures just as millions of indigent Baby Boomers come to rely on it to survive.

Senator Tom Harkin understands this coming crisis better than most of his colleagues in Congress and, more importantly, has a plan for dealing with our broken retirement system. Harkin's plan is built around a supplementary pension system called USA Retirement Funds, which would give every working American a pension plan using "existing payroll withholding systems for those that do not already have access to a retirement plan."

The system Harkin proposes would be everything that 401(k)s are not: It would be universal, unlike 401(k)s which many workers don't have access to at all; it would be automatic, unlike voluntary 401(k) plans which many workers ignore; and the funds would be pooled and professionally managed, unlike inefficient and risky individual 401(k) accounts where workers are left to make often unwise investing choices and also see their funds chipped away by fees.

The USA Retirement Funds would also convert account holdings into annuities when workers retire, so they don't run out of money -- unlike with 401(k)s, where retirees spend down their accounts themselves and engage in a guessing game about how long they will live.

Finally, USA Retirement Funds are far more portable than 401(k)s, making it easier for workers who move around a lot -- as many low-wage workers do -- to keep contributing to the same account and building up savings.

In all, Harkin's plan closely resembles the Guaranteed Retirement Account plan that New School economist and Demos Senior Fellow Teresa Ghilarducci has been advocating for years.

Harkin's plan is fuzzy on a crucial detail: How much employers would have to contribute to USA Retirement Funds, and it's not surprising that the Senator might not want to get into those details right now, with the economy so weak.

Yesterday, Harkin's plan was criticized by retirement expert Jane White, who argued that it didn't demand big enough contributions from employers. White's own plan, she writes, would mandate "more generous employer contributions-- equal to 9 percent of pay for Fortune 500 companies and 6 percent for other companies -- and require contributions to be consistent through an employee's job tenure."

White raises a strong point and if we want to advance a new universal pension system, it will be impossible to avoid a big battle over employer contributions at some point.

In the meantime, though, Harkin's plan gets the big stuff right and offers a roadmap for fixing America's broken retirement system.