This week, House Democrats released their preemptive response to the retirement security bill that House Republicans have been crafting over the past several months. "AmeriSave: A Democratic Plan for Retirement Security" consists of a modest series of recycled good ideas that would mainly help middle- and upper-class workers to save for retirement. The proposal completely avoids addressing Social Security and is equally silent about how House Democrats would pay for their plan. Given these lapses, the Democrats' plan would inevitably increase the deficit, raise the public debt, or raise taxes. Of no less concern, the Democrats' plan is unlikely to significantly aid the low- and moderate-income workers, inner-city and rural residents, and small businesses employees who most need improved retirement security. Even worse, any improvements in retirement income under the plan almost certainly would be consumed by the coming 30-percent cut in Social Security benefits that AmeriSave does nothing to prevent.
Improving retirement savings is extremely important, and those elements of the AmeriSave plan that would improve savings should be included in a bipartisan retirement security package. However, AmeriSave is not an ambitious attempt to improve retirement savings among those who need more savings most. Members of both parties need to develop innovative plans to further improve retirement and other savings and to work together on a comprehensive approach to both Social Security and other retirement savings plans.
AmeriSave is a collection of small changes to the way that Americans save for their retirements. Some would significantly assist workers to save for retirement, while others are well intentioned but unlikely to make much difference. The package includes:
- A $1,000
match for middle- and working-class families that contribute
$1,000 or more to a 401(k) plan, IRA, or similar retirement savings
plan. This will cost $1 billion for every million workers who
benefit from it. There is no indication in the plan of how this
match would be funded.
counseling for participants in 401(k)s and similar plans-but
only if their employers are willing to hire independent financial
counselors to give the advice. While the plan offers a tax credit
to employers, in practical terms, this benefit will largely be
limited to employees of larger corporations. Again, there is no
indication in the plan of how this tax credit would be
401(k) participation unless workers opt out from joining their
employers' retirement plans. This is an excellent idea with wide
bipartisan support, and it will help to significantly improve
retirement savings for employees of companies that offer retirement
benefits. However, it is hardly new and is expected to be in the
House Ways and Means Committee's retirement security bill.
- Faster 401(k)
vesting. This is another recycled idea. Congress reduced the
period before workers can fully own employer contributions to their
retirement accounts from five years to three years a few years
back. This proposal would further reduce that period.
- A tax-refund
IRA. This is an excellent idea with strong bipartisan support.
It would allow workers to directly deposit all or a portion of
their tax refunds into retirement savings accounts. However, it has
been around for some time, and is hardly new.
opportunities to convert retirement accounts into annuities.
This is yet another good, existing idea. It would encourage workers
to convert their retirement savings into monthly income
- Tax credits
for small businesses that offer retirement plans. This would
encourage small businesses to offer retirement plans to their
employees. This is needed because most small businesses today do
not offer anything like 401(k) plans. It is a good idea but would
likely have limited results. Again, there is no indication in the
plan of how this tax credit would be funded.
- Greater disclosure for underfunded pension plans. This provision is contained in H.R. 2830, which passed the House Education and the Workforce Committee earlier this year. It requires underfunded pension plans to inform workers and retirees if plan funding falls below a certain level and has strong bipartisan support, including from the Bush Administration.
The AmeriSave package also includes promises to prevent bankrupt corporations from dumping traditional pension plans and to reduce corporate executives' benefits if employee benefits are reduced, as well as measures dealing with conversion of traditional pension plans into cash balance plans. Unfortunately, there are no details about how these promises would actually work.
The Missing Pieces
The AmeriSave package, though containing a few good if not-exactly-groundbreaking ideas, falls short in several areas. These include:
- A way to pay
full Social Security benefits. AmeriSave offers no thoughts on
how to prevent the 30-percent cut in Social Security benefits that
will hit every worker born after 1979 and millions born before
then. It also offers no way to pay for the hundreds of billions of
dollars in unfunded benefits that have been promised to workers
born after 1955. The cost of fixing Social Security climbs by $600
billion a year, and delay on these crucial points will especially
hit our children and grandchildren.
- A way to pay
for AmeriSave. AmeriSave supporters offer no real details about
how they intend to pay the $75 billion cost of the program over the
next 10 years. Different news reports suggest that the money will
come from either raising taxes on upper-income workers or through
eliminating corporate tax loopholes. However, these are just vague
phrases and are backed by no firm information or scoring data. As a
result, AmeriSave is just as likely to increase the deficit and,
thus, the public debt.
- Serious efforts to increase pension coverage for small business employees and those living in rural areas and inner cities. While AmeriSave directs tax credits to small businesses that offer retirement plans to their employees, it does nothing to reduce the excess regulations that can expose small business owners to major lawsuits from unhappy employees. Small businesses also need simpler, lower-cost retirement plans that can also be offered through professional associations, chambers of commerce, and other groups. AmeriSave also does little to help workers in inner cities, where bank or securities firm branches are few and far between and all that often exists are check-cashing agencies. This is also true of rural areas, where the nearest bank or brokerage office may be miles away.
AmeriSave contains many good ideas that have been under discussion in the retirement policy community for some time. In this case, repackaging these ideas under a catchy title is not a major policy advance but just a "me too" attempt to distract attention from the failure of House and Senate Democrats to responsibly address Social Security. While AmeriSave will help employees of larger firms to save for retirement, it does nothing to prevent the massive cuts in Social Security benefits that will hit today's younger workers when they retire. It also does little to help those who need help with retirement savings the most.
David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.