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The President's Baby Steps Towards Retirement Security

The president's proposal is fantastic, really. But this is not enough. Helping workers to invest these accumulated assets and then to withdraw sensibly at retirement are two other big problems, which the president didn't touch.
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The nation's retirement wonks (and retirement industry executives) noticed that President Barack Obama made only general statements in his State of the Union speech Tuesday about how his administration would help workers save for retirement at work. The president also vowed to 'rebalance' the tax code, which means reducing retirement tax breaks for the wealthy. The plan's details were missing from the speech because the White House had released plenty of details beforehand.

Here they are. The president's retirement proposals -- submitted in his fiscal 2016 budget -- are a shot right across the bow of the rich. He proposes to cap the tax break for retirement assets. Remember Mitt Romney's over $80 million dollar IRA? Obama wants to close the loophole Romney and others are using. According to a new GAO report, there are about 314 individuals who have more than $25 million in IRAs (the average amount is $95,000). The loophole allows this elite group to put exotic low-valued assets into their IRA which, after they are in the tax-sheltered IRA, balloon in value. The returns are not taxed for years. Obama's proposal, if enacted, would result in a $3.4 million cap on retirement accounts at current interest rates and a loss of millions of tax breaks for these few hundred wealthy taxpayers. That helps free up money for the $320 billion Obama wants to use to finance tax credits for the middle class. It's a nice populist way to tidy up the tax code, but this re-balancing is not the main tenet of his retirement crisis plan.

Obama proposes requiring employers with 10 or more employees that do not now offer retirement plans to enroll workers, including part-time employees, in automatic individual retirement accounts. Pundits insist this won't work politically unless workers can opt out of the plans. (Thank goodness workers can't succumb to a similar temptation to opt out of Social Security). A more effective plan would be a Guaranteed Retirement Account (GRA), which would require every worker to save more for their retirement while giving lower-income workers a tax credit.

But never mind, they didn't ask me to give the State of the Union address. Back to the president. He also proposes to pay off, via a tax credit, those smaller employers that he would require to set up a payroll deduction. (Mind you, what's at issue is just setting up the payroll deduction -- an employer pays not a cent toward their workers' retirement under Obama's plan).

How effective would the president's proposals be? According to the U.S. Census, tiny firms (those that employ zero to nine employees) make up 79 percent of the total number of firms (according to U.S. Census Bureau data, there were 5.68 million employer firms in the United States). This means that the president's proposal would affect only 21 percent of private employers.

But what happens when we look at employees currently without pensions or retirement accounts? How many would be included and how many would be missed by the president's exclusion of employers with 10 or fewer workers? A recent report (pg 12-3) by the Investment Company Institute (ICI), a lobbying group for mutual funds, finds that in 2013, 37.9 million workers of the 50.6 million (aged 21 to 64) who report their employer does not sponsor a retirement plan are employed by firms with a workforce of 10 or more. This is pretty significant. It means the president's proposal would include 75 percent of private-sector wage and salary workers between the ages of 21 and 64 who are not offered a retirement plan at work -- though it would exclude more than 12 million who work for small firms like restaurants.

The president's proposal is fantastic, really. It helps cover a lot of people who do not have an easy and automatic way to save for retirement. However, mandates work much better. One example of success is Social Security, which covers about 94 percent of all workers in the United States. Most of the remaining six percent, the non-covered workers, are public employees.

But this is not enough. Helping workers to invest these accumulated assets and then to withdraw sensibly at retirement are two other big problems, which the president didn't touch. The president has not solved the predatory high fees and bad investment advice workers get in IRAs. IRAs are not regulated like pensions -- they're riven with conflicted advice and harmful fees -- and people can withdraw assets before retirement, leaving them broke when they are out of work and old.

We have a long way to go. But the president's automatic-IRA proposals have made exciting first steps toward helping all Americans retire secure.