Thursday, November 3, 2016

A Modest Retirement Benefits Proposal With Apologies to Jonathan Swift

If you were to ask an employee what are their most important employee benefits, they might tell you that they are their health coverage and their retirement benefits. And, for the last several years, with the passage of the ACA (ObamaCare if you prefer), their health care benefits are fairly well mandated.

Yes, employers have an option -- they can play (provide at least minimum essential coverage) or pay (a penalty for not providing such coverage. And employees not covered by their employers have an option -- they can get coverage (play) outside of their employer either privately or through a federal or state exchange or they can pay a penalty as part of their Shared Responsibility.

To a large extent, the Affordable Care Act came about because of what was viewed (perhaps rightfully) as a health care crisis in the US. Cost of care was increasing rapidly. The number of uninsured was growing. Insurers were perceived to be denying treatment to their insured, not because the medical option being pursued was not the best medical option, but because it was a better business decision for the insurer (the cost of care might include the savings related to the decreased cost of future care). So, for better, for worse, or for some combination, the federal government has largely told us what our health coverage should look like. Depending on your personal situation, you might choose to be the judge of how well that works for you.

Suppose that applied to retirement benefits as well. After all, many would tell us that we are in a retirement crisis as well. Yesterday, I saw some data that while I happen to not believe it said that 50% of Americans over the age of 50 have less than $5,000 in retirement savings. Frankly, if that is remotely close to the truth, we do have a retirement crisis.

Suppose we modeled a retirement benefit system after the ACA. And, suppose this was in addition to Social Security. What would be minimum essential coverage under the Affordable Retirement Act? Let's take a shot at it.

  • Everyone has an account balance into which their employer makes a mandatory contribution and the employee also makes a mandatory contribution. 
  • To the extent that the employee contributes more than that up to a point, their employer must match it. That match is to be more generous for the lowest-paid employees and phases out altogether for employees earning at least $250,000.
  • Withdrawals from the account will not be allowed before retirement.
  • When you do retire, your benefit will be distributed in the form of an annuity with death benefit protection much like a Joint and Survivor Annuity and will have annual cost-of-living adjustments.
  • Those annuities will be provided by insurance companies participating in retirement exchanges. The insurers will not be able to collect data on the participants to whom they are providing annuities, so they will likely not be able to understand the risk they are taking on.
  • Insurers will be limited in the cumulative profit they can earn on these annuities.
  • Employers and or employees who do not participate will have to pay into the system on behalf of others.
How does all that sound? Can you make it work for you?

Special note: there may be as little as nothing in this post that anyone agrees with including its author.

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