Three percent of income is also a lot less than 10 percent of income or more that financial advice givers in the U.S. often say people should set aside for retirement. Annuitization plays a role here, of course. Also, those with higher incomes will need to set aside more than 3 percent, since Social Security replaces a smaller percentage of their incomes. Ghilarducci and James simply figure -- and there's recent economic research to back this up -- that affluent people don't need tax deductions to get them to save for retirement. Finally, they assume that the pension managers in the GRA system would get much higher returns than most people do now in their 401(k)s and IRAs. This is not a baseless assumption:
Defined-benefit pension funds get a lot of bad press, some of it deserved. But when a state pension fund runs into trouble these days, it's usually because elected officials have promised too much and/or failed to set aside enough money, not because the fund managers have blown it. In the Ghilarducci-James plan, "state pension funds, traditional money managers, or a federal entity such as the Thrift Savings Plan" could bid to manage GRAs. These pension managers would get higher returns than existing 401(k)s and IRAs do, they figure, because (1) they're more sophisticated investors than most 401(k) and IRA owners, (2) they'll be able to invest in illiquid assets such as infrastructure and private equity that are generally off-limits in 401(k)s and IRAs, and (3) their administrative costs would be lower, as would their fees.
No, none of this is going to come to pass anytime soon. And even over the longer run, incremental improvements to the current system seem a lot likelier than a massive overhaul such as the GRA. But the Ghilarducci-James plan raises several issues that really ought to be a part of any national discussion about retirement. One is annuitization, which I've been harping on for years now. Another is the wisdom (or lack thereof) of leaving individuals in charge of all their retirement saving, asset allocation and investment decisions, which has been addressed by some 401(k) sponsors in recent years (with default contributions into target-date funds, among other things) but is still a big issue for the IRAs that most 401(k) accounts eventually get rolled into. Finally, there's the question of whether the more than $200 billion in annual tax breaks for retirement savings should mainly benefit the top 20 percent of the income distribution, as is now the case, or be targeted to make it more likely that everybody has an adequate retirement income.
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