Retirement: What to Watch in Washington

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Retiree advocates, by contrast, argue the U.S. retirement system leaves workers too much at the mercy of volatile financial markets, particularly as they near retirement, and does little for those who don't earn enough to save much toward retirement.

A Different World

Tweaks to 401(k) plans and new IRA proposals are "still about individual risk and individual contributions," says Karen Friedman, policy director of the Pension Rights Center, a retirement advocacy group. "It's a different world now. We can't just have the same incremental solutions to the problems we have."

One outcome could be the addition of guaranteed benefit options under automatic-IRA or similar programs, as an alternative to market-dependent mutual funds, Capitol Hill staffers say.

But calls are also growing to supplement Social Security with something less risky than a 401(k) and more available to lower-income workers. Representative George Miller (D-Calif.), chairman of the House Committee on Education & Labor, has held three hearings on retirement security since last fall and has said he is considering options to expand benefits beyond existing 401(k) plans.

One proposal that could form the basis for future legislation comes from the Economic Policy Institute, a generally liberal think tank, and would establish "guaranteed retirement accounts" to hold mandatory contributions from employees and employers that lack equivalent workplace benefits. A $600 tax credit—refundable to low-income workers who pay little or no taxes—would help offset the expense, and the government would guarantee a 3% annual return plus inflation. While employees would have individual accounts composed of their own and their employers' contributions, the funds would be managed centrally, to try to take advantage of lower fees and the better investment returns that big pension funds generally receive compared with most individual investors. (More details on the EPI's proposal are available at http://www.sharedprosperity.org/bp204.html)

While the ultimate shape of any change Washington makes to the way Americans save for retirement remains unclear, it's a safe bet that investors—including the huge baby boomer cohort now in, or about to enter, its golden years—will be watching the developments carefully.

Francis is a correspondent in BusinessWeek's Washington bureau.