401 (k) is the most common way to save money for retirement in the United States. But even before the corona virus epidemic, this approach was failing most workers. According to the Fed, half of all American households do not have retirement accounts. Reserve.
Meanwhile, low-income earners are left out: 40% of low-paid workers have retirement accounts, compared to 80% of middle- and high-income families. Workers who try to get away with something often fall short, don’t save enough, start too late, or lose money through wrong investment decisions or excessive fees. Are The median 401 (k) is a modest price today at $ 25,000 Vanguard.
One reason for this discrepancy is that low-wage workers have less money to start, and most of it is spent on day-to-day expenses. What’s more,– The ability to save tax-free – is basically a subsidy that doesn’t work much for low-wage earners because they don’t pay much income tax. In other words, there is no tax benefit for a low paid employee to put $ 10 in a retirement account and it would be more helpful to put this money in your bills.
In contrast, at the top of the federal tax bracket, an employee who puts money into 401 (k) gets an increase of 37% – the share she would otherwise pay income tax on these funds. Last year, tax breaks to save for retirement cost the government dearly. 3 153 billion – More than spending on Social Security disability benefits. According to the Center on Budget and Policy Priorities, most of these benefits reach 20% of earners.
“The government subsidizes people to save,” said Teresa Ghelardochi, director of the New School Retirement Equity Lab in New York City. Rich and poor, he added, “Retirement savings face completely different worlds. This is really the story of two savings systems.”
Ghilarducci is one of the authors of the bold new. Suggestion 401 (k) To expand the benefits of savings. The plan would enroll all U.S. workers in a program similar to the Federal Theft Savings Plan (TSP), a 401 (k) vehicle for federal employees. Basically, all workers will be automatically put in a beefed up 401 (k) – with a wide official match and low fees.
Such a plan could have a dramatic effect on the lowest paid workers. Today, one of the lowest-earning American households earns about ً 29,500 a year and has a total of 3 1,380 in financial assets. If that money is put into an account like TSP with a similar employer match, a worker can conservatively expect to see savings of $ 35,000 after 10 years. If the plan’s profits matched the stock market average, the balance would be $ 43,000 a decade and $ 126,000 20 years later.
Ghilarducci’s co-author of the retirement plan – Kevin Hast, a former White House economist who is now a prominent visiting fellow at the conservative Hoover Institution at Stanford University – may seem like an unexpected partner. Haset has been around for a long time Suspicion of inequality Who argues that looking at the income gap between Americans widens the gap between rich and poor. He once told Democrats.Economically illiterate“Trying to limit corporate stock buybacks, which benefit the disproportionately rich.
Yet the catastrophic recession that followed the Corona virus epidemic, as well as last year’s nationwide protests following the assassination of George Floyd’s police, reassured Hest that wealth inequality ” It’s destabilizing society, “he told CBS MoneyWatch.
“You couldn’t look at last year’s events and think like that,” Hast said. “People who took the money to the market and went to the epidemic had a much easier time. But half the Americans didn’t really benefit.”
Eliminate bad habits
Hessett called TSPs “our government’s best policy ever” because they are designed to acquire many habits that lead workers to lower savings. Eligible workers are automatically enrolled in a plan instead of actively signing up, and their employer matches a portion of their salary – a policy that dramatically increases retirement savings. Savers can choose from a few relatively easy investments and pay lower fees.
According to most metrics, savings plans are significantly successful, with more than 90% of workers eligible to participate in TSP, even among the lowest earners. Covering about 6 million workers, it is the largest retirement savings plan in the country.
“We want to take this simple, well-designed product and spread it to everyone,” said Ghilarducci.
Inequality in the spotlight
At a time when wealth inequality is close to record levels and is the subject of it., Hassett and Ghilarducci are hoping their plan will have a two-way appeal. For one thing, it doesn’t mention raising taxes, instead focusing on “creating wealth” for the poorest – an idea many conservatives say they support.
The project will require federal funding because it requires the government to spend a portion of a worker’s income, but Hest believes the costs are worth it. About ڈالر 60 billion a year would be spent on a 3% pay match for all workers, the authors estimate – half of what the nation spent on food stamps this year. And by allowing workers to invest their savings in private markets at a higher rate of return, the government will eventually reap the benefits of that investment in the form of future taxes on their return.
“The authors have conveyed this proposal to political leaders, and we have received a positive response,” Hast said. “If you are worried about the future of a free enterprise, you should allow low-income people to save now,” he added.
For its part, Ghilarducci sees this policy as a protection against future revenue shocks. It is estimated that about 400 people have written to him since the onset of the epidemic, seeking advice on how to establish long-term savings.
“Middle-income people are trying to save for the future,” he said. “We are in a moment of hope, and people want long-term hope.”