Automatic IRAs: An alternative?
President Barack Obama has proposed making retirement savings universal through an individual retirement account (IRA) that is funded by automatic direct deposits from paychecks. The concept is the brainchild of the Heritage Foundation and the Brookings Institute, and has been endorsed by publications as diverse as The New York Times and the National Review.
The automatic IRA as initially proposed would be available to employees whose employers don’t offer 401k plans. It’s not viewed as a replacement for the 401k, but it would work as simply as direct deposit currently works to funnel savings into financial institution accounts as directed by employees.
But a key difference would be the ability of the employer to select a single provider of IRA services rather than allow employees to direct their funds to a provider of their choice.
Employees would not be forced to participate, but would have to formally opt out. Unlike the mandatory guaranteed retirement accounts Ghilarducci proposes, the automatic IRA is more of a “nudge” to direct employees to save more for retirement.
“Libertarian paternalism” is the seemingly contradictory term used by some behavioral economists to describe this approach. Yet given the deep divisions over health-care reform, our federal debt, and the need to reform entitlement programs, The Retirement Security Project, a nonpartisan project supported by The Brookings Institute, the Pew Charitable Trusts, and Georgetown University’s Public Policy Institute, is an excellent resource for information on the retirement crisis. It has a lengthy white paper devoted to automatic IRAs.
Ghilarducci’s proposal for guaranteed retirement accounts may never come to fruition, but “When I’m Sixty-Four” is as good and accessible as any book that clearly outlines the crisis facing Americans in retirement.
While mandated savings may be a tough sell, the simple fact is Americans may need more of a paternalistic approach than a libertarian approach. The latter may have a strong political or philosophical appeal, but given the pathetic state of 401ks as a strong retirement vehicle, the former may be far more practical.