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Americans’ Working Years Need a Better Ending

Suppose presidential candidates were genuinely interested in addressing retirement insecurity. Could they find common ground?

(Bloomberg Opinion) -- A comfortable retirement is supposed to be the culmination of the American dream, yet far too many actual Americans are falling short of achieving it. In the spirit of fan fiction, I'd like to set up a better ending. If today's presidential candidates really wanted to ensure a secure old age for everyone by 2044, what issues would they be debating?

Let's start by establishing some facts. Americans' retirement is far from secure. The share who think their savings are on track has been falling, and hit a low point of 31% in 2022, according to a survey from the Federal Reserve. Even among 60-year-olds, on the cusp of retiring, only 41% felt on track.

The main problem is a lack of effective savings mechanisms. Half of US workers have no access to a retirement plan at their current job, and nearly half have no retirement account at all. Even fewer have other kinds of savings for old age, such as regular investment accounts, defined-benefit pensions or real estate.

Now imagine that the presidential campaigns, eschewing personal attacks and AI-generated deep fakes, put a debate about retirement security front and center. What might their positions look like?

On the left, many liberals dislike the tax break for employer-sponsored retirement accounts. In theory, it’s a nice idea: Contributions are excluded from taxable income, allowing workers to reap returns on a larger sum of money. In practice, it’s a subsidy for the rich. Remember, most workers don’t have access to such accounts, and those who contribute most also tend to be the highest paid. Less than 15% of the benefit flows to the bottom 60% of the population by income. It’s also expensive: At 1.3% of gross domestic product, it’s the second-largest income-tax expenditure (after the employer-provided health insurance exemption). Why not take that money to fund retirement accounts for the poor?

On the right, conservatives target Social Security. The program takes in more than $1 trillion every year, from the combined 12.4% payroll tax that employers and employees pay on annual earnings up to $168,600. Yet that isn’t enough to cover outlays in recent years, and the trust fund that covers the difference is expected to run out in about a decade. No doubt, Social Security has succeeded in keeping a lot of people out of poverty, but it’s not 1935 anymore. People don’t need the government to guarantee an inadequate return; they should have the opportunity to achieve better returns in the stock market. If they had separate accounts, maybe there wouldn’t be a shortfall, and the government wouldn’t need to consider increasing the tax rate or the cap on taxed earnings.

What’s remarkable is how both sides end up in a similar place: Americans should have individual accounts for retirement that the government contributes to, but that they control. The only difference is the source of funds. The left would prefer to repurpose a tax preference, the right would rather tap Social Security.

This common ground has even found expression in a specific proposal, from New School professor Teresa Ghilarducci and Kevin Hassett, an economist at the conservative American Enterprise Institute. For Americans without an employer-sponsored retirement plan, they advocate offering an account modeled on the federal Thrift Savings Plan, which features a limited number of prudent investments and could include a government match to encourage contributions.

The remaining question to put to Americans, then, is how to realize such an idea. Should we stop subsidizing 401k plans, and use the money to equally subsidize all Americans’ retirements? Should we convert all or part of Social Security into individual accounts? Should we leave the existing mechanisms as is, and add individual accounts to the mix? If we want to achieve retirement security for everyone, the only bad option is doing nothing.

More from Bloomberg Opinion:

  • Three Myths About Investing for Retirement: Allison Schrager
  • Annuities Are Back in Fashion, But Are They Safe? Aaron Brown
  • Social Security Is Lurching Toward a Real Crisis: Editorial

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To contact the author of this story:
Kathryn Anne Edwards at [email protected]

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