401(k) Specialist Issue 2 - 2020 - 17

401(k) BEST PRACTICES
you can see if he's done it. If you're participating
in a defined benefit plan, you have
no idea if he's done the right thing. And
quite often, they haven't. " Biggs said. " Social
Security is promising a benefit 20% higher
than what it can currently afford to pay, and
you don't know how it will be resolved. So,
sometimes having a simple program is better
because it's more transparent and it's harder
to kick the can down the road. "
Unintended Consequences
We asked Biggs to name some of those
" poor policy prescriptions " he claimed
would backfire. Surprisingly, he mentions
state-sponsored IRAs.
" Some people say this is just a no-brainer
and why wouldn't we do it. There are two
reasons why you would at least think twice. "
First, he said there isn't much evidence
that low-income Americans are under-saving
for retirement.
" If you look at Congressional Budget
Office figures, the bottom 20% of the
earnings distribution gets a replacement rate
from Social Security equal to 85% and 90%
of their average pre-retirement earnings.
It's not clear, therefore, that they need to
save more for retirement. If you push them
into saving more, that money is no longer
available to put food on the table, pay their
mortgage, put their kids through college
and all the things they want for a better
life. The poverty rate is substantially lower
for retirees than for working-age Americans.
That by itself hints that low-income
workers probably won't be made better off
by saving more. "
The second reason is that many low-income
Americans receive some sort of
means-tested government benefit-Medicaid,
SNAP, TANF, housing subsidies, etc.
" Once they build assets in an auto-IRA,
they may be disqualified from some of
these benefits. And the states know this, "
he argued. " They've run numbers calculating
how much they'll save once auto-IRA
balances disqualify retirees from Medicaid
coverage. The problem is that states have
told workers they need auto-IRAs and
saving will make them better off. In fact, the
main beneficiary might be the government
itself. "
Giving everybody access to a retirement
plan makes sense, but state IRAs were
" rushed through and not fully thought out "
in terms of need and the potential downsides.
" I'm
fine with having a substantially
stronger safety net for low-income retirees, "
he concluded. " However, given the
rapid growth of incomes for middle- and
high-income retirees, do we need to stick
younger people with higher payroll taxes
to pay higher benefits to retirees who-to
be frank-don't need the extra money?
There are a lot of other pressing needs for
taxpayer money, especially today. Retirement,
whether it's private savings or Social
Security, involves massive amounts of money,
so changes made to these programs really
matter. "
ISSUE 2 2020 | 401kSpecialist.com
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401(k) Specialist Issue 2 - 2020

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