Professor Ghilarducci has won the backing of many labor and liberal groups with her proposal for “Guaranteed Retirement Accounts,” which would require that 2.5 percent of each worker’s pay be withheld to finance a new retirement plan on top of Social Security. (A $600 refundable tax credit would help soften the hit.)
She also calls for requiring employers to match that amount, a mandate that businesses would surely oppose. Such a system would be managed by the government and subsidized by it and would guarantee a 3 percent annual return. Ms. Ghilarducci said her plan would give Americans nearly 25 percent of their preretirement earnings. In other words, someone who retired after earning $75,000 a year might receive $19,000 a year in Social Security and another $18,000 annually from this new plan.
Ms. Munnell of the Boston College center also supports creating a new tier of retirement savings by requiring new deductions from employee paychecks. But unlike Professor Ghilarducci, she does not support a mandatory employer match and she would preserve the 401(k) system, creating a new system on top of Social Security and 401(k)’s.
“We need a new tier,” Ms. Munnell said. “Our retirement system isn’t big enough. Not enough people are in it, and many people aren’t saving enough. No matter how much you try to spruce up 401(k)’s, they’re never going to provide enough retirement income.”
In July, Senator Tom Harkin, Democrat of Iowa, proposed a plan that would be financed by pretax funds from workers’ paychecks, although workers could opt out. Employers would have to contribute. Mr. Harkin noted that half of all Americans had less than $10,000 in retirement savings and that 75 million workers were without access to a workplace retirement plan. “We face a retirement crisis,” he said.
Mr. Wray of the 401(k) council said critics were too quick to condemn the 401(k) system and propose far-reaching changes. He said 401(k)’s had many underappreciated advantages. They generally allow people to pass on far more of their retirement money to their heirs than traditional pensions usually do. Another big advantage of 401(k)’s, Mr. Wray said, is that many corporations are embracing them over traditional pensions because pensions, unlike 401(k)’s, can cause companies to owe millions of dollars in unanticipated liabilities when the stock market falls.
“The great thing about 401(k)’s is the enormous flexibility,” Mr. Wray said. “They’re voluntary. You can structure a plan that works for you,” He acknowledged that many people nearing retirement age had not saved enough in their plans, but he said that was because many had saved for only 20 years, not for their entire career.
“If you consistently participate in these programs over 40 years, you’re home free,” he said.
When created in 1978, 401(k)’s were a way for highly paid executives to shield income from taxation. Later Congress adapted them so they could provide supplemental retirement income for millions of workers on top of Social Security and traditional pensions. It was not foreseen that 401(k)’s would evolve into the nation’s main employer-sponsored retirement system.
“This system just hasn’t produced the type of participation you’d like to see,” Ms. Munnell said. “I think this argument that these plans are new is getting old. They’re not new.”
David John, a pension expert at the conservative Heritage Foundation, dismisses the likelihood of enacting far-reaching changes like those supported by Senator Harkin and Ms. Ghilarducci. Partly because of industry opposition, he said, “starting something wholly new would be virtually impossible.”
Mr. John argued that it would be wise to keep the 401(k) system, imperfect as it is, and improve it. With some reservations, he praised the automatic enrollment features of the Pension Protection Act of 2006, which allows companies that offer plans to automatically enroll new employees,, typically at 3 percent of pay, although workers can opt out.
He also praised the law’s automatic escalation provisions, which enable companies to ratchet up employees’ contribution rate from 3 percent in an employee’s first few years unless workers opted out. He criticized Congress for essentially setting 3 percent of pay as a default investment level. “The 3 percent level is a huge mistake,” he said.
He wants Congress to raise the automatic enrollment’s default participation rate to 6 percent. That, he said, would hardly reduce enrollment and would create a larger nest egg for retirement.
The battle over whether the 401(k) system needs some fine-tuning or radical surgery is still gathering force. “A czar would be able to fix this easily,” Mr. Bogle said. “Whether politicians can fix this is something else again.”