Don't Tell Joe: Obama and McCain Agree on Something

Don't tell Joe the Plumber, but John McCain and Barack Obama actually agree on something.

I stumbled across this startling information while looking into a proposal making the rounds in Washington aimed at creating new retirement saving options for lower-income Americans.

Called the Automatic IRA, it could keep millions of Americans out of poverty in old age. It gets at one of the toughest challenges to retirement saving-the simple fact that half of the country's working population doesn't have access to a workplace retirement savings plan.

The Automatic IRA concept enjoys bi-partisan support. It proposes creation of a new retirement savings vehicle for the 75 million Americans who don't have access to 401(k) plans where they work. That's because they work for employers-mostly small businesses-that don't sponsor 401(k) plans, mainly due to the expense of administering and matching contributions.

A number of retirement policy experts believe the solution lies in creating a public-private IRA option for these workers-a defined contribution cousin to the Social Security system.

Several proposals are floating around but one of the most interesting is the Automatic IRA plan proposed by a group called the Retirement Security Project (RSP). It's a non-partisan organization whose principals include two of the nation's top experts on retirement policy-J. Mark Iwry of the (liberal) Brookings Institution and David C. John of the (conservative) Heritage Foundation.

Obama endorsed the Automatic IRA in the fall of 2007 and has had it posted on the issues section of his website ever since. McCain endorsed it earlier this month in the course of responding to a questionnaire from a group of business and trade groups focused on employee benefits -- even though it contains a dreaded government mandates.

McCain supports a mandate on business? It seems so. Here's how the Automatic IRA would work. Companies that are not willing to sponsor any retirement plan, have been in business for more than two years and have more than 10 employees would be mandated to offer a payroll-deduction saving option to their employees-no different from the way employers deduct for taxes. Employees would be enrolled automatically when they are hired, unless they chose to opt out.

All this would be fairly painless for employers. They wouldn't have to make matching contributions, or comply with the plan qualification and fiduciary standards required in employer-sponsored plans. The employer simply acts as a conduit, remitting the deducted pay to an IRA account.

Another Retirement Security Project proposal would complement the Automatic IRA by changing the current Savers Tax credit to make it refundable. The current credit offers a non-refundable credit up to $2,000 for lower- and moderate-income married couples for contributions to an employer plan or IRA. But that has value only if you have an income tax liability. The RSP plan would be refundable and added directly to the saver's retirement account, so it would help even those who owe no income tax.

The RSP proposals embrace a model of simplicity to encourage participation and positive investment outcomes; most experts point to the complexity of most retirement plans as a major barrier to saving.

The RSP Automatic IRA would put savers in a default investment, such as a lifecycle fund geared to the individual's expected retirement age, with two or three simple alternative investment options for those who decided to opt out. The automatic IRA would probably default savers into Roth IRAs rather than traditional IRAs, since most of the targeted savers are in low tax brackets.

Overall, Iwry and John estimate that 50 million families could benefit from the RSP proposals.

I've posted more detail about the Automatic IRA concept this week at http://retirementrevised.com

Follow Mark Miller on Twitter: www.twitter.com/RetireRevised

Comments

[LizM]

Have you looked at the Canadian model of providing a pretty decent 'tax break' for saving up to 18% of earned income inside of a "Registered Retirement Savings Plan" (RRSP)? You can invest this money in any way you see fit and watch it grow in a tax-sheltered RRSP. Whatever contribution you make every year automatically comes off of your earned income for that taxation year. You can even carry over unused contribution amounts to future years.

It really is one of the best ideas ever to come out of the Canadian government, in recent times.

[robinhood1]

Unfortunately, Canadian mutual fund fees are even higher than in the US, as the Canadian financial industry is highly protected.

[LizM]

Ah, but not all nor even most mutual funds have fees attached!

[LeftRight]

And one other thing, why are they considering this? Isn't it basically just another Social Security?

[iambusto]

as long as Congress doesnt do the following, i dont care what they come up with.

1) DONT force the participants in the plan to only invest in US treasury bonds. I dont want the govt. looking for another source of investors who are forced to buy its bonds when china & middle east refuse.

2) allow people to opt out of the plan. meaning it cant be mandatory for workers. I am happy investing in my 401(k) (even though i am down 30% for the year), and IRA.

[kmsbt]

Please, before we jump too high for joy and hurt ourselves, more about the "50 million families could benefit from the RSP proposals." Who would manage the Automatic IRA program? The government, as in the current Social Security system, or selected investment banks, as in the privatized SS plan? The former may be inefficient and disorganized but at least its core mission consists of more than just skimming transaction fees from a huge, captive audience.

Just trying to avoid more risky neocon snake oil about helping 50 milliion families when the only sure winners will be 50 already-very-wealthy families.

[Hylia]

The government should not tax our IRA due to the fact that we have lost much of our money in the stock market. I would like a resonse.

[Mark Miller - Huffpost Blogger]

I could see that kind of idea coming up for discussion in Washington to ease the impact of a recession on people.... especially if Obama wins next week. But I bet it would be enacted on a temporary basis (maybe a few years). Here's my question, though: if you're think you should get a tax break because you've lost money in the market, what happens if stocks have rebounded by the time you want to withdraw your money? Should you still get a tax break then? I don't think market declines, per se, are justification for a tax break. That's the risk you take when you invest in the market.

[LeftRight]

Is this the whole thing about the removal of tax deferment for 401(k)s? Cause that's the latest thing that I've been seeing.

[Mark Miller - Huffpost Blogger]

Not really - those are separate ideas Obama and McCain have floated as temporary aid to people in the economic crisis. Obama proposes to ease the impact of the current economic crisis by allowing retirement savers to withdraw up to $10,000—or 15 percent—of their 401(k) or IRA account funds in 2008 and 2009 without penalty to meet short-term financial needs. McCain proposes temporarily reducing taxes on distributions from retirement accounts to a 10 percent rates; under current law, distributions are taxed as ordinary income.

[LeftRight]

No, I heard something about the House and Senate trying to pass a bill which would remove tax exemptions from deposits into 401(k)s and also create a new system, which sounds like this one.