Legislation Aims to Get Retirement Savings Started Early

January 8, 2007 (PLANSPONSOR.com) - A U.S. Senator has a solution to the problem of retirement saving procrastination - starting at birth.

Senator Jeff Sessions (R-Alabama) plans to introduce new legislation that would establish savings accounts at birth for every American – and he’d fund them with a $1,000 contribution from the federal government, beginning in 2008.   The so-called PLUS Accounts (for Portable, Lifelong Universal Savings Accounts) would be invested in a limited number of funds – Sessions sees the federal government’s Thrift Savings Plan (TSP) as the model.  

Parents of children would pick the funds, and parents and grandparents also would be allowed to contribute up to $5,000 annually to these accounts.   However, Sessions claims that even without any additional contributions, and given a reasonable rate of return, the initial $1,000 endowment would be worth $50,000 to $100,000 when each individual reached age 65.

Employer Match

However, beginning in 2009, his legislation would also call for 1% of every worker’s paycheck to be automatically deposited into his own account for the first $100,000 earned annually, with employers required to match this 1% contribution. Worker contributions would be made pretax while employer contributions would be tax-deductible – and both workers and their employers would have the option of contributing above the 1% level, up to 10%, applied against pay up to $100,000.  

Funds contributed to PLUS accounts would be the legal property of each account holder - and, as the name suggests, they would be portable, not tied to any individual employer - but they could not be touched until age 65.   Any funds remaining at death could be passed on to a spouse, children, grandchildren or anyone of the holder's choosing (including a favorite charity). Account assets would be protected from creditors and would not be considered in determining eligibility for any federally funded benefits or in calculating estate tax liability.   Oh - and this program would exist outside the Social Security system, not altering the program in any way.

How Much?

In an  Op-Ed piece  in the Washington Post, Session says that if PLUS accounts are initiated at birth and require a portion of every paycheck to be invested, the average American citizen could retire with nearly $300,000 (he assumes a 6.59% rate of return - the same rate as the TSP's most conservative fund since 1987, for someone that makes $46,000/year - the median household income in 2005, and the 1% contribution level).  

In the Op-Ed piece, Sessions says, "Our nation's saving rate is a big problem. It requires a big solution. We cannot tinker with the federal tax code and expect personal savings to increase dramatically."

Sessions estimates that the annual $1,000 start-up contributions would cost the government $4 billion a year, plus administrative costs for a new board to oversee the Plus Account investments and manage the program.