SAFE Retirement Plan -- A Paper from the Center for American Progress

The Center for American Progress (CAP) released a paper entitled American Retirement Savings Could be Much Better. For readers interested in the topic of retirement savings, I would highly recommend a read or at least a perusal of the paper. The authors are Rowland Davis, a well-known actuary who very clearly does have the training and experience necessary to undertake such a study and David Madland, a commentator on the economy, unions, retirement policy and public opinion. Not having the same background as Dr. Madland, I am not in a position to judge his background and experience, but as the paper is well-founded, I will presume that he too is highly qualified to opine on this topic.

Essentially, the authors propose what is often referred to as a collective savings or collective defined contribution plan. Under such a plan, in a nutshell, a worker would enroll in a SAFE (secure, accessible, flexible, and efficient) retirement plan. This plan would have all of these characteristics (not an exhaustive list):

• Workers would opt into a SAFE Plan of their choosing
• Employers could choose to contribute or not
• Plan assets would be professionally invested at what would currently be considered very low levels of fees
• Workers' accounts would get the returns on the professionally managed pools of assets subject to a floor and a ceiling (in combination, referred to as a collar)
• At retirement, the account balance would be converted to an inflation-adjusted annuity

Let's consider what the authors have created here. Essentially, it's a contributory multiemployer cash balance pension plan with a set of features not currently permitted under the Internal Revenue Code for qualified plans. 

What a novel concept! The authors have chosen to separate retirement policy from tax policy. For this, they are to be applauded. Combined with the access that CAP has to legislators, this has far more value than when your poor little blogger (me) spews forth similar ideas ("public policy" ramblings in this blog). 

Frankly, this is a pretty cool idea. It has these attributes that are very positive:

• The plan is portable
• It provides for retirement income
• It reduces "leakage" (the authors would have us believe, according to my reading, that it eliminates leakage and this might be the case if workers never experienced bouts of unemployment, but alas, they do)
• The retirement income is somewhat protected against inflation
• Employers can be employers of choice by contributing to their workers' SAFE Plans

What I like best about the proposed design, however, is that it violates the current Internal Revenue Code in oh so many ways. The retirement plan design is founded on retirement policy. Note the symmetry!

I would be remiss if I did not point out some of the issues that I take with the authors' work. In their paper, in at least one of their models, they appear to assume historical equity and fixed income returns going forward, but 2% inflation. In my opinion, this set of assumptions is not internally consistent. In my lifetime (it started in late 1957), there have been only 12 years out of the 55 from 1958 through 2012 in which inflation was less than 2% while in the other 43, the rate of inflation exceeded 2% annually (you can see the data here). 

Assuming that workers' salary deferrals to a SAFE Plan would be continuous from entry until retirement at age 67 is unrealistic (rates of unemployment are high). However, regardless of the assumption, SAFE Plans would be safer for workers (by a lot) than the current mostly 401(k) system that we have. Again, that is the point that the authors seek to make and they make it well.

Finally, in giving workers the option to reduce the automatic contribution to SAFE Plans, the authors tempt reality. To think that the typical worker will have the discipline to continue contributing at the appropriate level in times of hardship, need, or even desire to spend, is not, in my opinion, realistic. Once again, however, the results inherent in SAFE Plans far outpace those in the current retirement system.

The financial economists in the actuarial profession will scoff at the assumed equity risk premium. This is a debate on which both sides are fervent and will likely never agree. Regardless of who turns out to be correct, however, SAFE Plans will outperform any other equal cost plan currently permitted under the Internal Revenue Code.

Unlike most (in my experience) papers on retirement policy published by think tanks, CAP has engaged a highly qualified and experienced retirement actuary. Mr. Davis has made a set of actuarial assumptions and has disclosed the key assumptions. The paper has been reviewed by a group of individuals, two of whom are credentialed actuaries. I rue that several other of the reviewers are life-long Congressional staffers and or think tank workers, but I did not fund the work, so I have no say.

Ardent Republicans in my readership will have the inclination to look for flaws in the paper. Fervent Democrats will likely be in awe of the wondrous solution. I choose to read it with both a jaundiced eye and an open mind. It's a significant step in the right direction.