US struggles for saving grace in retirement

FT.com

Give America a raise, President Barack Obama urged private sector employers at the State of the Union speech last Tuesday while launching his inequality agenda for 2014. No matter that urging Fordism on today’s cash-hoarding chief executives is as futile as urging the Republican-controlled House of Representatives to hike the minimum wage.

Nowhere are the limits of the President’s agenda more stark than in the area of pensions, where the disparities between rich and poor are extreme and growing. Of course, this is a problem that comes home to roost far enough in the future that Congress seems likely to ignore it again.

The Treasury says around half of working Americans have no available pension savings plan. That rises to 75 per cent of part-time workers, who are among the lowest paid.

Worse, since economic inequality is linked inextricably with racial inequality, undersaving for retirement is especially acute among black and Latino households. The National Institute for Retirement Savings found that, among near-retirees, the average pension savings balance among households of colour was $US30,000, one-quarter of the average balance in white households.

Obama’s eye-catching but negligibly effective retirement savings initiative in the State of the Union was the creation of something he is calling myRA. According to its inventors at the Treasury, this should be pronounced “My R-A”, a tongue-twister such that even the president fluffed it during his speech.

‘My retirement account’ is a government-run savings scheme that will pay interest in line with US Treasury yields, up to a maximum balance of $US15,000. Savers can put in as little as $US5 a fortnight through their pay cheques, and get their money out at any time.

Quite apart from scepticism that employers will clamour to offer the new savings product if they do not already offer a workplace retirement account, the contributions involved after tax will not be enough to make a difference to someone faced with a large drop in income at retirement.

The Treasury hopes that persuading low-income households to save even small sums will be habit-forming, and they might then graduate to more realistic retirement planning.

As for the fund management industry, the best that it could find to say about myRA was that it got people talking about the pension savings crisis.

“The program is a great step in the right direction, and opens up a debate around policy proposals,” says Fredrik Axsater, head of defined contribution at State Street Global Advisors.

There does not seem to be great optimism that Congress will take up any of the proposals that have been floated, whether they be new ‘safe harbour’ provisions to allow employers to take bigger pension contributions from employees by default, or rules to encourage defined contribution schemes to band together to get a better deal from fund managers and to spread the investment risk for employees.

As for the President’s hope that Congress would “fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans”, that is a non-starter. This idea of limiting the tax-free pension saving that the wealthy can do in order to free up money to fund-savings incentives for those on lower incomes went nowhere when Obama proposed it last year. The cries of outrage from the fund management industry after this year’s State of the Union seemed moot.

What myRA does have going for it is that it is a zero-fee savings vehicle, since management fees disproportionately eat into the pension pots of those who are saving the smallest amounts.

There ought to be more good news on fees on the horizon, when the Department of Labor proposes new rules this summer that will impose a fiduciary duty on all retirement savings advisers. That ought to make it harder to suck fat commissions out of tiny pension pots at moments such as retirement or when a person moves jobs and has to roll over their savings.

But progressives are increasingly despairing of private sector savings solutions. Elizabeth Warren, lioness of the Senate, has thrown her political weight behind the idea of dramatically increasing social security as the only fair way to guarantee a dignified retirement for middle and working-class Americans.

That might be the raise that America most desperately needs.

Copyright The Financial Times Limited 2014.