Folks more likely to save in a plan they understand


DO WE really need yet another retirement-savings account? That's what President Clinton proposed in his State of the Union address.

The president wants government-sponsored Universal Savings Accounts (USA), to foster more personal savings. Whether that would happen in practice, however, is hard to say. In recent years, a rash of new retirement accounts has been lavished on workers and businesses without much effect.

About half the private work force participates in a retirement plan. That proportion has changed very little over the past 15 years.

Each new offering seems to confuse people as much as encourage them.

Consider: You now have three types of Individual Retirement Accounts from which to choose (traditional deductible, traditional nondeductible and Roth); six plans for small businesses or the self-employed (SEP-IRA, two kinds of SIMPLEs, three kinds of Keoghs); and several employee plans (401(k)s for businesses, 403(b)s for schools and nonprofits and 457s for state and local governments).

All have different rules. You can't necessarily move from one type of plan to another. At retirement, the withdrawal rules can send you to bed with a migraine.

"It's an alphabet soup," says Olivia Mitchell of the Pension Research Council in Philadelphia. "Each of these programs seemed appealing at the time, but each is for a niche group. There's no clear notion of what our retirement policy should be."

If I were czar, I'd tell Congress to simplify the plans we've already got, and deposit any government money into existing types of accounts. Or create a government-sponsored account, and let both employers and employees deposit contributions there -- so everything could be in a single spot, with one set of rules.

I'm dreaming, of course.

Right now, two "reform" trains are chugging down the tracks: The privatizers. They want to divert a portion of your payroll tax into a personal account that you'd control. Your Social Security benefit would drop, as would any benefit paid to a spouse from your account. Money from some other source (maybe an income-tax surplus?) would help cover the cost of benefits already on the books.

You're hoping that the growth of private accounts would cover the indexed government benefits that you're giving up. You might be able to make additional, after-tax contributions to the account.

The overlayers. They want to give you a separate, government-funded account, akin to a national 401(k). With President Clinton's USA, workers would receive a modest annual sum (say, $75 or $100), plus a government match for part of their own contributions, up to a fixed amount.

Sen. William V. Roth Jr., a Delaware Republican, backs a Personal Retirement Account, initially lasting just five years. Each year, you'd get a payment linked to the size of your Social Security tax.

Under either reform, you'd still get a guaranteed Social Security benefit. But privatizers favor lower benefits (with a guaranteed minimum), plus personal accounts.

Clinton would rather keep most of Social Security intact. To help pay for future benefits, he'd try to improve the trust fund's investment returns by moving 15 percent of the money into indexed, stock-owning mutual funds.

Even under the Clinton plan, however, Social Security couldn't stay solvent without some minimal change.

Benefits might have to be cut -- say, by putting off the year when you can start receiving retirement checks. Payroll taxes might be applied to a higher level of earnings (this year, you're taxed on the first $72,600).

The Employee Benefit Research Institute tested a partially privatized Social Security system, with 5 percent of your payroll tax diverted into a private account. EBRI assumed that young people put most of their money into stocks, and that older people leaned toward bonds. It also included the cost of supporting people already on the rolls.

Surprise, surprise. After 40 years, most people alive today would get lower real benefits than traditional Social Security pays.

You need to know that private accounts are no free lunch.

There are practical problems, too. Who will administer these accounts, especially for the people receiving $100 or less a year? What happens if the budget surplus shrinks?

People can be paralyzed by too many choices. Memo to Congress: Please don't confuse us any more. Make savings simpler, and watch the money pile up.

Pub Date: 2/01/99

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