Analysis How to fix Americaʼs broken ret…

Saved to Dropbox • Apr 19, 2017, 4D31 PM

Show Caption

RETIREMENT

Analysis: How to fix

America’s broken
retirement system
Aa
_ +
Michael Molinski | Special for USA TODAY
Updated 5 hours ago

Three past presidents have tried in

vain to fix America’s woefully
underfunded retirement system.

Presidents Bill Clinton, George W.

Bush and Barack Obama tried to push
retirement plans through Congress. All
of them failed, most recently President
Obama’s plan, which was to be called
the Retirement Enhancement and
Savings Act, died in Congress when
President Trump took office.

Three past presidents have tried in

vain to fix America’s broken retirement
system. Presidents Bill ...more
Getty Images/iStockphoto

Trump currently has no plan to fix

America’s retirement system.
Messages to his office from USA Today
were not returned. Trump plans to
overhaul America’s tax system, but the
401(k) was not changed as part of any
recent House Republican bill on taxes.

WHY DO WE NEED
CHANGE?
The current retirement system in
America hinges on the 401(k) plan,
which replaced pensions as the go-to
source of retirement income. But over
the past 35 years that effort has been
failing because participants are not
contributing enough, asking for
withdrawals and not repaying 401(k)
loans. More participants are
instead treating their 401(k) as a
checking account and making very little
effort to learn how to manage their
investments. The chart below outlines
how less than half of Americans now
participate in retirement plans And
those that do have an average of
$14,500 in their retirement accounts,
when they will need between 20 and
30 times that amount.
“What we really need is a national
plan to address leakages, to reach
the half of Americans who are
uncovered workers and to
address high fees and drawdowns,”
says Anthony Webb, economic
policy research director at The New
School. In a nutshell, there are three
ways to fix America’s retirement
system:
 Tweak the current 401(k),
IRA and other retirement
accounts.

Replace the 401(k) system

with something new.

Look at the broad picture and

try to fix America’s retirement
system.

TWEAK THE CURRENT

SYSTEM
There are people who are happy
with their 401(k) and see no reason
to change. But for the nearly 50% of
Americans who don’t have a
retirement plan, solutions are
needed. Too many are resorting to
fund drawdowns and getting hit with
early-withdrawal penalties. More
ideas are needed to broaden access
to 401(k) accounts. And we need to
end confusion about how
Americans should invest their
retirement funds.

One suggestion is to eliminate the

10% IRS penalty on withdrawals
from a 401(k) or IRA. There was a
time when that penalty was needed
to discourage people from
withdrawing funds from their
retirement accounts. However, that
10% penalty hits mostly the middle
class, those who have enough cash
to open a 401(k) but not enough
money to leave it in the account.
Most people resorting to a
withdrawal have either lost their job
or need the cash for emergencies.

We could also expand ways to

encourage companies to contribute
a matching amount to employees’
retirement accounts, or expand
small business retirement plans and
individual retirement plans to cover
more companies and more people.
Or we could expand the private
sector’s participation in
managing 401(k) accounts, rather
than leaving it up to the individual.

REPLACE THE 401(K)

There have been several attempts at
replacing the 401(k). The latest to gain
traction in the media and in
Washington is a plan devised by
Theresa Ghilarducci, a professor of
economics at The New School, and
Hamilton James, president at
Blackstone.

Their idea is to create a new

Guaranteed Retirement Account for
everyone who has a job. It would be
mandatory, managed by a government-
appointed board, and everyone would
contribute 1.5% of their salary and
another 1.5% would be contributed by
their employer. The funds would be
invested in stocks and bonds until they
retired, and then would pay out an
annuitized stream of income until death
or until his or her beneficiary dies.

RELATED:

For seniors, rising credit card debt

squeezes tight

Boost your retirement income with

these 8 tips

However, it could run into legislative

and public opposition. First, people are
reluctant to a take a mandatory amount
from their paycheck, even if it’s just
1.5%. Second, people tend not to trust
the government to manage their
money, let alone private financial
companies.

“Many people distrust a big

government program. But this isn't
one,” says Ghilarducci. “We have found
in focus groups and surveys that
people like the simplicity of the plans. It
is a personal savings plan that relies
on individually-owned accounts and not
a government.”

If the plan ever makes it to the

legislature, there is likely to be a
jockeying for control of the investments
and the structure of the annuities
between the private financial sector
that would manage the investments
and the insurance industry, which
would argue it should manage the
annuities.

LOOK AT THE BROAD

PICTURE TO COME UP WITH
SOMETHING NEW
U.S. Sen. Bernie Sanders, I-Vermont,
made headlines last year with his
proposal to simply expand Social
Security. People are living in fear that
their Social Security is going to be
eliminated, when in reality we should
be doing to opposite, he argues.

“Our job must be to expand it so that

every American can retire with dignity
and respect,” Sanders says, proposing
to lift the cap on Social Security taxes
“so that everyone who makes over
$250,000 a year pays the same
percentage of their income into Social
Security as the middle class and
working families.”

The proposal has some merit, but it

doesn’t change the fact that Social
Security funds are invested in
government bonds, which over time
have drastically underperformed the
market. For Social Security to stop
drawing from younger classes to pay
for Social Security for older workers, it
needs to have better returns.
One suggestion would be to carve out
any new Social Security funds that are
approved into a separately managed
account which would have a
government-appointed board, but the
funds would be invested in the market.
The California Public Employees’
Retirement System — the country’s
largest pension system -- has a similar
model, and it has managed to return
7% annually over the past 20 years, in
spite of some hiccups along the way.

A final suggestion is to resurrect

pensions as a retirement tool but, to do
so, the U.S. would likely have to pass
tax legislation that would encourage
employers to resurrect pensions, and it
might even require messing with the
Employee Retirement Income Security
Act of 1974.

Whatever the solution is to America’s

retirement system, know that a deep,
structural change is needed, whether
that means fixing the current 401(k)
system, replacing 401(k)s, or creating
something new. Now is the time to get
a viable retirement plan in front of
President Trump and Congress, before
they create a system that is not right
for America.

Michael Molinski is a New York-based

economist who has written and edited
several books on investments and
retirement. He is a 15-year veteran of
the financial industry, most recently as
Retirement Editor at Fidelity
Investments.
Originally Published 7:03 a.m. ET April 19, 2017
Updated 5 hours ago

Share your thoughts

AD CONTENT by Taboola

Missouri Homeowners Born Before

1985 Are Getting a Huge Reward
Morning Finance | LendingTree Quotes
The Bishop - $15.95
$15.95 - readers.com

25 U.S. Cities Where You Can Live

Rich on Any Salary
Forbes
Just Released Pics: 2017's Top Trucks
Search Truck Ads

MORE FROM USA TODAY

Why Trump is vulnerable to

impeachment: Allan Lichtman
Opinion 35 hours ago

The Trumps host a soggy but solid first

White House Easter Egg Roll
Life 2 days ago

Punchlines: Ready for Easter?

Apparently the White House wasn't
Opinion 5 days ago

Fact check: Bernie Sanders wrong on

voter turnout
News 24 hours ago
Derek Jeter, Jeb Bush reportedly
combine efforts in bid to buy Miami
Marlins
MLB 2 hours ago

Elizabeth Warren: 'Fearless' foe

against a charging Donald Trump?
News 2 days ago
 Back To Top

CONTACT US

TERMS OF SERVICE

PRIVACY NOTICE

YOUR CALIFORNIA PRIVACY NOTICE

DOWNLOAD MOBILE APPS

AD CHOICES

PRESS ROOM

ENTER FULL SITE

© Gannett 2017