Teresa Ghilarducci is professor at The New School. Tony James is executive vice chairman at Blackstone. The opinions expressed in this commentary are their own.
When the United States first dealt with the coronavirus pandemic in the spring, Washington moved with unprecedented speed to tackle many short-term economic effects by providing massive support to small businesses, the unemployed and taxpayers. But a longer-term crisis is growing that will cause lasting damage to millions of people if it remains unaddressed.
Covid-19 has accelerated the systemic failures of our retirement system, particularly for women, minorities and non-college educated men. With widespread unemployment, the pandemic is estimated to have pushed over three million older Americans into poverty, in large part because they were forced to retire earlier than planned. Most of these people have no safety net.
According to government estimates, only about 40% of Americans have access to a workplace retirement savings plan. And, an estimated 27% of current or recently unemployed workers who have savings through a 401(k), IRA or other retirement account have already tapped, or plan to use these savings as a source of immediate income during the crisis. As the pandemic has raged on and emergency aid has started to dry up, this number could rise even higher.
Even more troubling is the outsized impact on non-White Americans, women and those with lower earnings who work for small businesses. Roughly one out of every five non-White older workers had lost their job by June. Even before Covid-19, women were 80% more likely to be impoverished at age 65 and older than men. Additionally, the Economic Policy Institute estimated that just 41% of Black families and 35% of Hispanic families had retirement savings as of 2016.
Meanwhile, neither Congress nor the White House has done enough to help retired workers or those nearing retirement age. With 10,000 Americans turning 65 every day, the retirement crisis is now — and it will only get worse.
The current system must be fixed because it leaves too many people out. It is tied to long-term employment with large companies and doesn’t fit today’s gig economy. Everyone needs to invest continuously in a protected retirement plan, but 401(k)s cover too few workers and do not help lower-income Americans save. Even for the affluent, changes in tax laws and other factors have eroded the advantages of 401(k) plans.
The good news is that there is a way to solve our nation’s retirement crisis.
A national retirement savings plan would be tied to everyone’s Social Security number. People could then transfer balances to their national retirement account from their paychecks or from their scattered employer-sponsored 401(k)-type plans and keep their retirement money in one place throughout their working lives. If someone never had an employer-sponsored plan, they and their employer’s contributions, along with any refundable tax credits, would be in their national account. The national plan could also be an added option for people who have 401(k)s with their current employer.
Converting the tax deductions that benefit mostly higher-income earners to a tax credit for everyone of up to $600 per year, coupled with a modest employer match, would more broadly reward enrollment and allow people who live paycheck-to-paycheck to save for old age. With a universal national plan, millions of full- and part-time workers who don’t have a plan would have their own retirement account. At retirement, accumulated savings would be converted into a safe, lifelong annuity so the tax-favored money would be paid in old age (not for remodeled kitchens).
Low-income Americans have been hit especially hard by Covid-19, and we need to help them rebuild their savings with additional programs as they re-enter the workforce. But the issue is broader than that.
Surveys show that retirement security is the single biggest worry for people of all income levels and demographics. The lopsided distribution of retirement income contributes to the racial wealth gap. While 401(k) plans are a valuable piece of the retirement puzzle, we need a retirement system that provides universal coverage, invests effectively and guarantees lifelong income after retirement.
We can put in place just such a plan. As we described in detail in our book, the plan requires no new taxes, no increase in the deficit and no new government bureaucracy. By doing so, we can ensure all Americans a safe and secure retirement.