As Congress and the New-President reacts to the modern financial orderchanging forever, they should realize that individual retirement plans based on that financial order and have also changed forever.
However, President–elect Obama’s campaign proposed expanding individualprivate retirement accounts. This is a fundamentally bad idea because individual accounts do not deliver what Americans need or want, a safe source of retirement income. Existing individual retirement accounts have lost approximately a third of their value in the last three months of 2008 which has turned older workers’ and retirees’ lives upside down; people are panicked -- as they have been chronically anxious -- aboutbtheir old age futures. Obama’s proposal would make the situation worse.
Obama proposed “Automatic IRAs:” employers with 10 or more employees,who do not already sponsor a retirement plan, to automatically deduct contributions from their workers’ paychecks and deposit them in anIndividual Retirement Account (IRA). The employer chooses the financial service company to manage their accounts or workers could choose their own. Workers could opt out if they choose. Automatic IRAs would make matters worse because it expands the system of individual retirement accounts that is riddled with major problems: workers don’t save enough in them; employer contributions are voluntary; workers withdraw money before retirement; rates of return for these accounts are low because workers are not professional investors and the fees are hidden and charged on a retail bases; there are conflict of interests between the financial institutions and employers: workers take on financial risk they can not mitigate; and annuities are expensive because they are voluntary.
I propose Congress set up universal Guaranteed Retirement Accounts (GRAs) and rearrange the $80 billion of tax subsidies for individual retirement accounts -- 401(k)s and IRAs --- so that every worker contributes $600 to his or her GRA each year. Every worker who does not participate in an equivalent employer-sponsored DB plan will save five percent of compensation through contributions into a Guaranteed Retirement Account. (Employers could elect to pay for all or a portion of the workers’ share of the Guaranteed Retirement Accounts, if desired.) Workers would earn pension credits based on the accumulation of these deposits, plus a generous rate of three percent investment return, adjusted for inflation. The average earner would replace 70% of retirement income with Social Security and GRAs after 40 years of work.
