Washington's role in all this is smaller than many people think. That's because the feds already have approved a host of tax-advantaged retirement savings products, such as individual retirement accounts, 401(k)-type savings plans, and annuities. Across-the-board expansion of such incentives usually results in more-affluent workers shifting existing savings from taxable accounts into new tax-advantaged accounts -- costing the Treasury billions in lost revenues without spurring much new saving. So federal efforts to boost retirement savings should target poor and working-class households, which have lower savings rates.
To do this the Bush Administration would be wise to note the encouraging results of a recent H&R Block-sponsored study that found IRA use skyrocketed when the contributions of low- and moderate-income taxpayers were matched at varying percentage levels. When such taxpayers were not offered matching payments, only 3% contributed to an IRA. When a 50% IRA match was offered, the participation rate jumped more than fivefold, to 17%. The cost to the Treasury would be only about $15 billion -- 10% of what it currently costs the government to subsidize the retirement savings accounts of mostly middle- and upper-class taxpayers -- yet it could jump-start retirement saving among millions of people who need it most. The Treasury also should consider allowing income tax refunds to be split between two accounts, enabling a taxpayer to deposit a portion into a bank account and the rest directly into an IRA or other retirement savings account -- a low-cost fix.
Still, government action is only part of the solution. Companies must expand the use of so-called automatic 401(k) plans, which enroll employees in retirement savings plans unless they opt out. This approach, used by about a quarter of large companies, including J.C. Penney (JCP
) Corp. and IBM (IBM
), typically boosts 401(k) participation by new workers more than 50%. Participation rates and contribution amounts also jump when businesses offer more investment help for often-confused workers. Next, financial-services companies must do a better job of creating retirement and long-term care products that have cheaper fees and are easier to understand.
Finally, workers must accept that the era of employer paternalism is over -- and the demise of nanny government may not be far behind. So relying solely on Social Security, Medicare, and a company pension for retirement security is risky at best. The smarter, safer approach is to plan for a future wherein retirees work longer, pay more for medical and long-term care, and receive lower Social Security and pension payments than previous generations did. This tough new retirement reality won't be a stroll down the beach. But if workers aren't prepared for the worst, their retirement years may turn out to be anything but golden.