President Barack Obama and Vice President Joe Biden are pushing a package of middle-class incentives and proposals, including an increase in the child care tax credit and a limit on student loan payments to 10% of a graduate's income after a basic living allowance is factored in.
Intriguing ideas. But there's another White House proposal that's likely to get support from conservatives and liberals alike: so-called opt-out retirement accounts for Americans who lack a 401k or other employment plan from their employer.
Opt out sounds like a subtle variant of opt-in programs, which account for three-quarters of American workplace retirement programs. But there's a powerful difference, according to Cass Sunstein and Richard Thaler, the authors of the book "Nudge." If people have to choose to participate in a savings program, fewer will join than if they have to choose not to participate.
"We have lots of evidence that it’s a method that works extraordinarily well at overcoming inertia, laziness, mindlessness and all the reasons that many people just never get around to joining a 401k plan," says Thaler, an economist at the University of Chicago.
And by making opt out a choice, such a program doesn’t impinge on the "responsible reasons why someone might not want to be saving for retirement, especially when they are young," Thaler adds.
Too many choices
One 2007 Harris poll found that 98% of workers who opted for their employers' automatic enrollment plans were glad they had the option to do so. But about 80% of those who opt out are also glad to have the option, according to a December research paper from two economists at the Urban Institute.Incentives for employers to create opt-out enrollment in retirement plans came into being with the Pension Protection Act of 2006. But so far there's no program for those in workplaces without employer-sponsored savings plans.
Account contributions would be deducted from paychecks and invested in an account run by a bank or mutual fund group. It would be up to employers to determine whether they allow individual employees to select their own managers.
The cost to the employer to set up the system is marginal, says David John, a senior fellow at the conservative Heritage Foundation and a member of the bipartisan Retirement Security Project. By creating a simplified, central system, the program aims to overcome another aspect of trouble with getting Americans to save: a dizzying array of choices.
"The more options people have, the more likely they are to do nothing. They throw up their hands in bewilderment, they say, 'Well, this is complicated. I’ll take care of it tomorrow,' and tomorrow isn't any different from today," says Barry Schwartz, a psychologist at Swarthmore University and the author of "The Paradox of Choice," which details how increased options can produce paralysis.
Helping Americans put more money aside may seem counterproductive in a recession, but a little austerity now can help individuals build financial resilience for future downturns, John said.
"We’ve been grossly under-saving. You really need to have a cushion," he says. "This is a case where, hypothetically, you might reduce consumption by a small degree. Instead, we think this is where the worker puts money away for retirement and that makes them and us better off when they do retire, because if they don’t have this money put away they are going to be depending on taxpayer funds."
And unlike health care or stimulus spending, the administration's middle-class proposals in general and the automatic IRA specifically get support from the left and the right sides of the political aisle.
"We can’t think of anything now besides motherhood and apple pie that gets bipartisan support," Thaler says. "It’s not clear who should be against giving the middle class a way to save for retirement when 40% of their retirement savings were wiped out by the stock market crash."
This article was reported by David Grant for The Christian Science Monitor.
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