As the baby boomer generation nears retirement, the shortcomings in the nation’s upside-down system of incentives for retirement saving are becoming increasingly apparent. The existing structure is upside down for two reasons:
In part reflecting this upside-down set of incentives, the nation’s broader pension system betrays several serious shortcomings:
The bulk of the policy changes that have been enacted in recent years, moreover, move the pension and broader saving system further in the wrong direction: They provide disproportionate tax benefits to high-income households who would save adequately for retirement even in the absence of additional tax breaks, while doing little to encourage lower- and moderate-income households to save more.
The Administration’s new savings proposals would exacerbate this flawed approach. The Retirement Saving Account proposal and Lifetime Saving Account proposal would induce substantial asset shifting by high-income households, do little to boost saving among moderate income households, and significantly reduce revenue over the long term. Over the next 75 years, the revenue cost of the proposals would amount to a third or more of the actuarial deficit in Social Security.
A better strategy would encourage expanded pension coverage and participation among low- and middle-income households by:
I would also like to note that a new Retirement Security Project at Brookings and George Washington University, funded by the Pew Charitable Trusts, is studying ways of bolstering financial security for America’s aging population by raising retirement savings and improving long-term care insurance products. It brings together pension researchers and health care experts to examine areas such as the opportunities and challenges involved in using home equity to purchase long-term care insurance; reforming the existing saver’s credit to strengthen its incentives for moderate-income households to save; and removing the disincentive for pension saving implicit in the existing asset tests under various means-tested government programs.