Why Not a "Super Simple" Saving Plan for the United States?

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Abstract

Despite decades of significant tax subsidies for pensions and retirement accounts, most Americans retire with little or no pension saving. This paper suggests that it is possible to create a "Super Simple" saving plan that would provide a basic, low-cost, easily administrable plan with the potential to increase significantly the retirement assets available to moderate- and middle-income individuals. This plan follows the lead of a new system about to be implemented in the United Kingdom, which features automatic contribution for employees who do not opt out, a significant government match, and simplification of existing rules amongst other elements.

Introduction

Despite decades of significant tax subsidies for pensions and retirement accounts, most Americans retire with little or no pension saving. The federal government will give out more than $750 billion in estimated tax subsidies for pension plans between 2007 and 2011, and yet, many low- to middle-income families have too few financial assets to afford retirement.

The United States needs a pension system that addresses 21st century needs, one that complements and is able to accompany any Social Security reform the nation is likely to see in the near future. This paper describes one way forward, following the lead of a new system to accelerate the growth in personal retirement assets about to be implemented in the United Kingdom. The United Kingdom moved boldly to reform its private pension system by encouraging significantly greater accumulation of pension assets and protections in old age for the vast majority of the population.

The United States has its own pension history, so it must apply the British lesson to its own circumstances. This paper suggests that it is possible to create—using the language of the pension world1—a “Super Simple” saving plan that would provide a basic, low-cost, easily administrable plan with the potential to increase significantly the retirement assets available to moderate- and middle-income individuals.

The basic features of the Super Simple plan resemble the U.K. reform plan, but within a U.S. context. The Super Simple plan would (1) create solid minimum levels of employer contributions for low- and moderate-income workers, (2) include automatic contribution features for employees who do not formally opt out, (3) remove many of the complex discrimination rules surrounding retirement plans, (4) create a significant government match for savers to replace the largely symbolic match now in existence for only a few taxpayers, and (5) streamline today’s multiple 401(k)-type plans through a simple plan design attractive to employers and employees alike.

We realize that we are suggesting the most substantive set of reforms since the Employee Retirement Income Security Act of 1974. Almost all subsequent reforms have mainly patched the existing system while trying not to take any options away. Any simplicity gains under one new option considered in isolation were often more than reduced by the complexity of having so many options to understand. Most important, their effect on increasing the net saving of households has been modest, if any. A few reforms have been quite creative—particularly the movement toward auto-enrollment. But their primary failing is their inability to establish a base of retirement security for low- to middle-income individuals.

The problems posed by the pending increase in retirees (soon close to one-third of the adult population will be receiving Social Security), the unavoidable reform of Social Security, and our poor record on national saving despite the abundance of available tax subsidies now compel action. And they require more than ad hoc tinkering. It is time for a radical structural change, yet one rooted in simplicity and in the American private pension system. And, maybe in this case, our mother (country) does have something to teach us.

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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.