U.S. House of Representatives Committee on Education and Labor

Ghilarducci presented the following testimony before the US House Committee on Education and Labor on October 7, 2008. Watch her full testimony here and read it here.

“As we sit here, the number that you cited that most Americans don't feel they can live comfortably in retirement has only gotten worse. I mean, as we sit here, hour by hour, as the market fails, and Peter Orszag's numbers get worse. The panic now actually tops off chronic anxiety that we have been seeing for the last 10 years, and that anxiety is caused by the corrosive effects of 401(k) plans and other defined contribution plans.

Despite a 30-year history with 401(k) plans and DC plans, we have seen that we have not expanded pension coverage, we have not increased the national savings rates. Though, we have added to the profits of the financial sector and to the expansion of the financial sector, and we have extracted ever increasing tax subsidies from the Treasury.

Now every English major knows that if you show a gun in the first act, it will be used by the last one. I am going to show you $80 billion of tax subsidies. By the end of my presentation, I am going to spend it, to help everybody.

Short term, I propose--and last week I did an op ed to the New York Times--that the Congress allow workers to swap out their 401(k) assets, perhaps at August levels, for a guaranteed retirement account. Just a one-time swap, trade in your 401(k) for a guaranteed retirement account that will be composed of the equivalent of government bonds that pay 3 percent real return, and the promise will be that when you collect Social Security you can draw from that account balance for an annuity that would top off your Social Security plan. That plan is detailed in a longer paper that I have submitted.

How would this work? You go back to your districts and you meet up with a 55-year old who had had $50,000 in his account last month, and now has $40,000 in the account. He can swap out that $50,000, valued in August, for that guarantee of what would become, if he retires at 62, a $500 a month addition to Social Security.

The economy is probably in recession. We economists don't call it until after it is over. But a guaranteed income from his 401(k) account could actually take off some anxiety that that recession is going to cause him.

A long run solution is for you all to recognize that we have a long-term retirement crisis. It is not in Social Security, but it is in this heavily subsidized voluntary commercial tier of retirement security. Half the workers have not been covered at any one point in time by any kind of retirement account. Most Americans, especially the folks in your districts who are now under 60, are going to be at a real risk of not even replacing 70 percent of their retirement income.

I propose that every worker get a guaranteed retirement account, that we mandate that they save 5 percent on top of Social Security. That will, with a government credit of $600, that will actually give every worker at least 1 percent replacement rate, which will, on top of Social Security, give you 70 percent replacement rate.

Where do I get that $600 credit for everybody? I mean everybody, people who aren't covered. I get it from the $80 billion we now spend on DC accounts.

The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks, which, with Peter Orszag's research, we know goes to the very highest income earners. Fifty percent of these subsidies go to 6 percent of the population. All that happens is that we transfer money from taxed accounts to untaxed accounts.

Worse, this inefficiency is growing. If you look at your Treasury numbers, the value of these tax expenditures to these wasted tax breaks are projected to grow 49 percent, while those for traditional plans are only going to fall by 8 percent. If we implement automatic IRAs or we expand the 401(k) system, all we are doing is adding to this inefficiency.

So I propose that Congress establish a universal pension plan on top of Social Security, funded by workers' own contributions but subsidized by a rejiggering of those tax breaks so that everyone has $600 going forward every year into their retirement account.”