When Millions Can’t Afford to Retire, the U.S. Needs a Better Option

A custodian mops a floor in an office building at sunset.

According to a recent Associated Press survey, almost a quarter of Americans say they plan to never retire, and it isn’t because they all love their jobs. The United States faces a retirement crisis. Workers have been forced to assume more and more financial risk, and as a result, many won’t have enough to live with dignity when old age arrives. Boston College’s Center for Retirement Research projects that half of workers will reach retirement with too little savings to fund it. When tens of millions of Americans all have the same problem of setting aside too little money for retirement, it’s not a failure of individual initiative. It’s a sign of a structural problem—one that can’t be solved by scolding people to save more.

This article was adapted from The Public Option, by Ganesh Sitaraman and Anne L. Alstott

Fortunately, this is a problem that a public option for retirement savings can help fix. What we propose is a new, supplemental pension—in addition to Social Security—that is federally administered, open to everyone, and simple and safe to join. It would follow workers even if they change jobs, and it would last for life. Our public option wouldn’t solve the retirement crisis on its own, but it would offer participants a more secure future.

The public option is most familiar from debates over health care, where proponents argue for a public health-insurance plan that would be available to everyone and coexist with private plans. Public options, while underappreciated as an approach to public policy today, have been part of the American social and economic landscape for centuries. The Constitution gives Congress the power to create the postal service, which today provides a public option for mail and package delivery that coexists with FedEx and UPS. Millions of Americans take advantage of public schools, another public option, even as others opt out and send their children to private schools. If not for these options, families might theoretically hire private carriers to mail their letters and private schools to educate their children. But some families couldn’t or wouldn’t, and private companies’ interests may not align with society’s. Society as a whole functions better when everyone has access to communication and education.

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Establishing a secure retirement for American workers is a social good, too. And the United States already has one type of public option—Social Security—designed with that purpose in mind. The venerable program offers a baseline public pension to Americans. No one is required to take it, and anyone can add private savings or a private pension on top of it.

While expanding Social Security would be a big help for many retirees, Social Security was never intended to fully fund anyone’s retirement. The average new retiree collects benefits of about $1,470 a month, or $18,000 a year. That’s a welcome safety net, but economists estimate that most people need about 60 percent of their pre-retirement income to maintain their living standard. Employer pensions and private savings are supposed to make up the difference.

But over the past few decades, employers have shifted the financial risks of retirement onto workers. The first problem is that, between the decline of unions and the hunger for higher corporate profits, more than half of American workers now have no workplace pension of any kind. Those who are lucky enough to have a retirement plan at work face a second problem. The vast majority of plans now are defined-contribution plans, such as 401(k)s, rather than defined-benefit plans. This means that workers can’t count on a fixed sum of money every year in retirement (the defined benefit). Instead, they put aside a fixed sum while working (the defined contribution) and are left to the whims of the stock market for their retirement savings. A few bad investments or a stock-market crash at the wrong moment can mean calamity.

The third problem is that investing isn’t just complicated; it can be dangerous. Some products have high fees that can erase investment gains, and many investment advisers have no legal obligation to act in the best interest of their clients. Some even receive bonuses and kickbacks from investment funds. The fourth problem is the bittersweet risk of simply outliving your savings.

The reality is that the combination of Social Security and private retirement products hasn’t been sufficient to guarantee all Americans—or even a majority of Americans—an adequate standard of living in their later years. Congress should shore up Social Security. But American workers need something more.

Here’s how the public option that we propose would work: Every American would automatically be enrolled in a retirement program that would withhold, say, 3 percent or 5 percent from every worker’s paycheck. The money would be deposited in a retirement savings account managed by the federal government, and the savings would be locked up until retirement. Savers would have limited investment choices, and the short menu would include only low-fee index funds, such as a “life cycle” fund targeted to the saver’s intended retirement date. At retirement, the balance would be converted to a life annuity, paying a guaranteed sum every month for the rest of the worker’s life. No one would be required to participate, and market options would compete side by side with this public program.

Our approach would be easy to use, and it isn’t pie-in-the-sky. In fact, the system we describe here builds on one that already exists. Federal employees already have a fantastic 401(k)-type retirement option called the Thrift Savings Plan. It has extremely low fees, and it offers a simple set of investment choices.

The benefits of this approach are considerable. Automatic enrollment would ensure that all workers can save consistently, even if they work for a company that doesn’t offer a 401(k)—or if they’re independent contractors ineligible for employee benefits. A short menu of low-cost investment options would enable workers to make reasonable decisions without becoming financial experts. Coverage would continue even if workers changed jobs. And annuitization at retirement would help ensure that workers don’t outlive their savings.

Workers aren’t the only ones who could come out ahead under this system. Small businesses that don’t offer pensions would benefit from improved morale among a newly secure workforce—and at no extra cost to the firm. Adding to the appeal of the public option is that it wouldn’t cost the government anything, because savers would pay (built-in and modest) fees to defray the system’s costs.

If Congress is willing to spend to help Americans with retirement, the new public option could make an even bolder impact through a universal match, which would add a certain percentage of annual savings to each saver’s account. The government match could also be progressive, with a larger contribution for lower-earning workers.

Like any policy, providing a public option for retirement savings does raise important design issues. For instance, the government would have to carefully pick investment managers who would act ethically and efficiently. But the Thrift Savings Plan provides a model for offering a limited array of index funds, and managing private contractors is a familiar issue throughout government. Moreover, the basic idea has been pioneered in California and in other countries, such as Great Britain. Our experience with this kind of public option, in other words, is solid and growing.

There is also the matter of collecting and coordinating information for 150 million workers so that contributions are tracked accurately. Here, too, the government has relevant experience: The Social Security system already tracks those same 150 million workers and monitors their wages, addresses, and work histories. Creating a new public-option retirement fund at a large scale wouldn’t be entirely simple, but it certainly has precedent.

The bigger picture is that a public option for retirement savings could go a long way toward addressing the retirement crisis in America. Instead of placing risks on individuals and then nudging them to save a few dollars more, the public option would offer universal access to a simple, effective annuity. And it would be a way to help millions of Americans reclaim their retirement years from the anxiety of making ends meet.