Plan Addresses Pension Funding Gap as Baby Boomers Retire
WASHINGTON (September 14, 2004) – Workers would save more and have sounder investments in their retirement savings accounts under a reform plan proposed today by scholars at the Brookings Institution and the National Center for Policy Analysis (NCPA). The plan will be released at a joint NCPA-Brookings Capitol Hill briefing at 10 a.m. in room 304 of the Cannon House Office Building.
“People make two mistakes: they invest in what they know and in what is safe,” said NCPA President John C. Goodman. “What they know is their company’s stock, but putting all your eggs in one basket is risky. What is safe is government bonds and money market funds, but the returns are too low.”
“Studies have demonstrated that inertia matters a lot for saving,” said Brookings Senior Fellow Peter Orszag. “Public policy should encourage both saving and diversification.”
The Brookings-NCPA reform proposal calls for savings plans that will create adequate retirement income over the course of a work life. The plan provides incentives for employers to:
- Automatically enroll employees in a 401(k) plan unless the employee explicitly opts out – rather than the other way around;
- Set a minimum contribution rate unless the employee specifically opts for a smaller contribution;
- Encourage employees to invest in diversified portfolios that reflect the market as a whole; and
- Default employees into such plans in cases where the employee does not have an investment preference.
These changes would not be compulsory, either for employers or employees. Instead, the proposal offers the carrot of lawsuit and regulatory relief in return for behavior that will produce a more secure and more prosperous retirement for millions of workers.