May 28, 2008 (PLANSPONSOR.com) -- I spent some of my precious three-day weekend perusing Teresa Ghilarducci's When I'm Sixty-Four, an intriguing title for a book about pensions-or, as the subtitle suggests, "The Plot against Pensions and the Plan to Save Them."

To her credit, Ghilarducci, an economics professor at Notre Dame, actually offers a serious proposal to provide a more secure retirement income stream for Americans, certainly for lower-income individuals.   It is unfortunate, IMHO, that she devotes but a single chapter of the 300-page book to exploring the "plan to save them," leaving the bulk to "the plot."   A "plot" that includes the complicity and outright scheming of employers, advisers, providers, and even the federal government (well, at least the Bush Administration).

The plan?   Well, she gets there by imposing a mandatory 5% FICA-like withholding (yes, in addition to the current one - this one also split between employer and employee) into a "Guaranteed Retirement Account (GRA)," imposing mandatory annuitization of those benefits (no lump sums, and no ability to pass that "account" along to heirs, though she would allow you to accept a reduced benefit for the ability to include a beneficiary in an annuity stream), doing away with the current tax benefits associated with 401(k)s, and replacing that with a $600 refundable tax credit that would be indexed for inflation.  

The "Plot"

As for the "plot," in Ghilarducci's view, employers offer defined contribution plans instead of traditional pension plans not because they are preferred by workers (in fact, she rather seems to doubt that) or because they are less impactful to the balance sheet (particularly these days), but simply because they are less expensive (there have, of course, been studies that refute that notion).   She decries the 401(k)'s disproportionate benefit to upper-income workers - which apparently results from the reality that they are more likely to actually participate in such programs than are lower-income workers.  

The Pension Protection Act's tightened reporting strictures on pensions were, in Ghilarducci's view, at best an overreaction to a non-existent funding crisis and, at worst, an overt move by politicians who so desperately wanted to promote an individual account system over defined benefits that they effectively legislated it out of existence.   Oh - and if you've been worried about Social Security funding, you can breath a bit easier.   Apparently, the actuaries are notoriously pessimistic, according to Ghilarducci.

In Ghilarucci's world view, the current travails of the nation's retirement system are not due to the lack of a coherent national policy, the aberration of a voluntary savings system inadvertently converted into THE retirement savings device, or the challenges that a pay-as-you-go Social Security design naturally experiences as it tries to pay for more people going than paying.   Instead, it all seems to be the result of some form of Machiavellian plot - and one that, IMHO, is a perspective of someone who has perhaps not spent much time with plan sponsors who agonize over the very issues she seems to think they proactively set in motion.  

She doesn't seem to think that we need a different or additional system simply because the current approach isn't working for everyone - rather, she seems to see the malicious and deliberate hand of employers in undermining the system (and, it seems, in championing the concept of working in retirement.   "Working 'retirees' help manufacture healthy profits," she says).

Little wonder, then, that her solution relegates employers to the role of payroll withholder (she makes an allowance for employer-sponsored defined benefit plans that contribute 5% of payroll each year), while-like many who see government as a necessary part of the solution-advocating what amounts to higher taxes for all, willingly embraces a broad redistribution of wealth, and puts the management of said funds in the hands of the federal government.  

Ghilarducci is remarkably sanguine, IMHO, about the funded status of Social Security and pension plans generally (though, as I have said in this column before, I think too much was made over the effects of the so-called "perfect storm").   She "solves" the apparent tax "inequities" of the voluntary savings system by imposing a new FICA-like withholding on everyone.   However, 5% withholding alone wouldn't be enough to do the trick--and that's where the pooling comes in, and where, like Social Security today, if you die early, your "account" is simply assimilated into the broader pool.   The financial risks attendant with the program's guarantee?   "Borne by the government, not by the worker," she explains-as though the government has a funding system independent of those workers.  

I think most Americans would find the Ghilarducci proposal problematic.   People who can save for retirement today but don't ostensibly have reasons (or excuses) that would be impeded by the 5% mandatory tax.   Those who currently have and appreciate the tax benefits of their 401(k) would surely hate to see that disappear (one wonders what would eventually happen to those workplace retirement plans and/or company matches if such a universal system were in place).   While Ghilarducci takes pains to distinguish the GRA from Social Security, those distinctions will be invisible to most workers, and with good reason.   Moreover, once the federal government gets its hands on that money, it's hard to imagine that Congress won't find other ways to spend it (one need look no further than how the original purpose and withholding rates of Social Security have morphed to today's design to appreciate the potential).

We do need solutions beyond what is available today, IMHO-and Ghilarducci's proposal will, and should, certainly contribute to the discussion.   However, I think that discussion would be better served with less emphasis on the alleged conspiracies—and more on the theories that will truly make a difference.

You can check out a paper that was a precursor to the book at http://www.plansponsor.com/pi_type10/?RECORD_ID=33536

http://www.sharedprosperity.org/bp204/bp204.pdf

Nevin E. Adams