Real Savings Plus: An Automatic Investment Option for the Automatic IRA

Abstract

The Obama administration has proposed bold new policies to expand retirement savings. Through a program of Automatic IRAs, the approximately 78 million, largely lower-income, American workers not currently covered by a plan at work would be able to save through automatic individual retirement accounts. The Administration also plans to simplify and expand the Saver’s Credit to give eligible lower-income savers a 50 per cent “match” on contributions of up to $1,000 to qualified retirement accounts. Together, these proposals promise to enhance the retirement security of millions of Americans. They provide both the savings vehicle and the savings incentive to enable more low- and moderate-income households to arrive at retirement with significant financial assets to supplement Social Security.

In this paper, the Initiative on Financial Security at the Aspen Institute proposes an investment option for the Automatic IRA: Real Savings (RS). RS combines two widely traded and highly liquid assets – Treasury Inflation Protected Securities (TIPS) and a broad-based equity market index – to provide savers with a personalized, automatic target date investment option. RS ensures the preservation of the purchasing power of contributions while at the same time offering the significant – and important – upside potential of market participation. RS thus provides low- and moderate-income savers with the opportunity for both growth and safety for their savings. Through an automatic, inexpensive blend of TIPS and the market index, RS protects all savers from the three most likely risks to retirement income – inflation, default by the bond issuer, and falling stock prices. By design, RS fully protects every dollar saved against economic cycles, market declines and loss of purchasing power.