After getting into hot water for criticizing Sen. Elizabeth Warren for wanting to expand Social Security, self-styled centrist Democrats Jonathan Cowan and Jim Kessler of Third Way are testing the retirement waters again by proposing, in a New York Times op-ed, to expand savings in IRAs.
This by itself would not be blog-worthy, since every Wall Street-friendly policy wonk wants workers to put more money into IRAs. What surprised me, though, was that they propose requiring employers to contribute 50 cents per hour in these accounts. This amounts to $1,000 per year for full-time workers, and, unlike many proposals, could actually make a difference to workers’ retirement security if savings aren’t siphoned off with high fees. Cowan and Kessler’s default investment would be a low-fee lifecycle fund overseen by a Thrift Savings Plan-like board. Though TSP’s lifecycle funds, which are composed of index funds, are too aggressive—the share invested in stocks ranges from 86% to 52% during the accumulation phase—at least they’re not obvious rip-offs like many 401(k) and IRA investment options.
Cowan and Kessler take pains to assure readers that their proposal has nothing in common with President George W. Bush’s plan to privatize Social Security. But it’s not clear whether they have renounced their previous support for Social Security cuts. If not, they don’t explain why we should shrink a well-functioning social insurance system in order to expand an individual savings system that leaves families financially exposed when breadwinners die or are disabled, financial markets tank, or inflation rises. Under the Third Way plan, retirees could also outlive their savings if they opt out of the default annuity. In the end, back-door privatization may not be that much better than a frontal assault.
Cowan and Kessler downplay the cost to employers, saying it would be less than one-sixth the proposed increase to the minimum wage. This is misleading, because the minimum wage increase only directly affects low-wage employers, who are indirectly subsidized through the Earned Income Tax Credit and other government programs targeted at low-income workers and their families. A more apt comparison is to the cost of shoring up Social Security. Assuming an average work week of around 35 hours, the Third Way plan would cost employers around $900 a year per worker. Multiplied by the 164,858,000 workers covered by Social Security, the bill comes to around $150 billion, or 2.4% of taxable payroll, only slightly less than the 2.7% required to close Social Security’s 75-year shortfall. In the Wall Street Journal, Cowan and Kessler lambasted as “reckless” Sen. Warren’s plan to spend an equivalent amount ($1,500 billion over 10 years) on Social Security.
All this to say, it’s a pleasant surprise to see Third Way embrace a universal retirement program. But it would be much more pleasant if we knew they supported the one we already have.