MONEY AND WORK

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March 9, 2009

THE CASE FOR A GOVERNMENT RUN PENSION SYSTEM

Dean Baker, Congressional testimony - In addition to the problems stemming from inadequate coverage and high costs, the current pension system subjects workers to far more risk than has been generally recognized. The government can solve all three problems by allowing workers the option to contribute to a government run pension system that would provide a modest guaranteed rate of return.

The system would be a universal system like Social Security, however it would be voluntary. To try to maintain high rates of enrollment, there can be a default contribution from all workers of 3 percent, up to a modest level, such as $1,000 a year. Workers could be allowed to contribute some additional amount, for example an additional $1,000 per year, that would also earn them the same guaranteed rate of return.

The system should also be structured to encourage workers to take their payouts in the form of annuities, except in the case of life threatening illness. For example, a nationwide system could easily offer free annuitization, while charging a modest penalty (e.g. 10 percent) to workers who take their money out of the account in a lump sum.

Ideally, there would be tax subsidies for low and moderate-income workers that would make it easier for them to put aside 3 percent, or more, of their wages. However, if budget limitations make subsidies impractical, there is no reason that Congress could not move ahead to establish a structure and consider adding subsidies at some future date.

The guaranteed return should be set at a level that is consistent with a long-term average return on a conservatively invested portfolio. Such a guarantee should pose little new risk to the government. As recent events have shown, in extreme cases, the government will step in to protect savings, as it did when it opted to guarantee money market funds, even where it has no legal obligation to make such a commitment. Guaranteeing a modest rate of return over a long period of time should present very little additional risk to the government.

The funds in this system would be kept strictly separate from the general budget. The investment would be carried through by a private contractor in a manner similar to the way in which the Federal Employees Thrift Saving Plan current invests the savings of federal employees.

Even a modest contribution could make a large difference in the retirement security of most workers. For example, at a 3 percent rate of return, a worker who saved $1,000 a year for 35 years would be able to get an annuity of $4,200 a year at age 65. Such a sum would be a substantial supplement to their Social Security benefits. A contribution of $2,000 a year would be sufficient to provide an annuity that is almost equal to 30 percent of this worker's earnings during their working career.

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