Pension Reform in the United States: Guaranteed Pension Accounts are Key

Abstract

Policy makers in the United States reacted swiftly to the recession by restructuring the nation’s collapsing financial institutions, yet they ignored the failing pension system. President Obama is now proposing pension reforms that will likely exacerbate its current problems of asset volatility and inadequate income replacement. This article offers an alternative: Guaranteed Savings Accounts administered by the Social Security Administration. At the start, retirement savings accumulated in Defined Contribution plans could be swapped for Guaranteed Savings Accounts guaranteeing a minimum three percent real rate of return. Over time, Guaranteed Savings Accounts would grow through contributions from employers and employees. Tax expenditures related to current 401(k) pension contributions could be distributed more fairly. This would allow lower-income workers to build their Guaranteed Savings Accounts further through pension tax credits. Accumulating retirement savings would be co-mingled, and professionally managed at low-cost. On retirement, Guaranteed Savings Accounts would be converted into life annuities. Guaranteed Savings Accounts would eliminate four major problems besetting the current American Defined Contribution-based pension system: High asset volatility, high fees, and the hedging difficulties with longevity and inflation risks.

Keywords: 401(k), Guaranteed Savings Account, Pension Fund, Social Insurance