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Make the TSP accessible to all Americans… And make it mandatory!There is a retirement savings crisis taking place right now in the United States according to the National Institute on Retirement Security.1 The March 2015 report from Dr. Nari Rhee and Llana Boivie paints a dark picture of the current state of our nation’s financial readiness. According to their study, which was a followup to a 2013 study, 40 million working-age households have no retirement account assets at all and the median retirement account balance is just $2,500 for all working-age households.When confronted by that figure the natural inclination is to point out the existence of Social Security. While Social Security does indeed provide income for all during their retirement years, it is woefully inadequate. The US Census Bureau2 showed that 15% of individuals 65 years or older was considered to be in poverty. Furthermore, excluding Social Security from the calculations would result in 54% of individuals 65 or older being in poverty. According to the Congressional Budget Office3 the Social Security trust funds will be depleted by 2029 if the current rate of withdrawal continues and the population dynamics continue to shift, which we have no reason to believe they will not. This will result in a reduction in payable benefits by 29%. A person collecting the average of $1,248 each month would then only receive $886. Could the system absorb this impact?One might also point out the retirement savings vehicles available today as satisfactory to remedy the crisis. The employer offered defined contribution plans like the 401(k) and the IRA are longstanding options, but they are simply underutilized and favor the top wage-earners overwhelmingly. To start, only 55% of private sector workers even have access to an employer sponsored retirement plan and only 51% of the working age population participated in the plans. Employee sponsored plans have also shifted in use. The use of employee defined benefit plans has declined from 39.6% in 1989 to just 21.3% in 2013. During this time the DC plans have gone from 32.6% to 59.7%. The responsibility to save for retirement has been shifted to the employees. As the amount of employers who offer retirement plans declines, whether DB or DC types, we have seen a shift in the concentration of retirement accounts to higher earners. In 2013 only 21.3% of the lowest quartile of household income had a retirement account, while 89.5% of top quartile households had one. Individuals certainly have many reasons to invest their wages into their own retirement accounts, chiefly among them the immediate tax benefits. This, however, welcomes a new wrinkle in our retirement crisis. With so many of the retirement accounts concentrated at the higher income levels we essentially have the lowest earners subsidizing the top earners retirement plans while they ultimately suffer. The Center on Budget and Policy Priorities5 points out that 66% of all retirement saving tax incentives go to the top 20% of the population and overall costs taxpayers $117 billion each year. More striking in their study is that the top 20 percent of households received twice as much in subsidies as the bottom 80 percent combined. The problem isn’t necessarily income inequality as much as it is financial education and familiarization, something that the United States sorely lacks. Many individuals aren’t aware that these vehicles to save for retirement exists, do not trust financial markets, or assume that Social Security will provide ample income in retirement. The recovery from the financial crisis of 2008 has also been not just slow to reach the lower wage earners, but almost nonexistent. 6With a dwindling pool of money to pay Social Security benefits and employer sponsored DB plans going the way of the Dodo Bird, something must be done to provide retirement savings to wage-earners at all levels. Simply paying more, while a great idea, would have a negligible effect on the savings rates of those individuals. A 5% increase in annual wages would not necessarily translate into 5% more saved for retirement. Complicating things even further is the threat of another market crash like we saw in 2008, where many individuals saw their retirement savings slashed in half, or worse. Individuals who want to save for retirement may be more hesitant to expose their money to that market risk. Giving every wage earner access to a low-cost and tax advantaged retirement account is one solution. Currently, every federal employee has access to the Thrift Savings Plan, my proposal is to not only give every wage-earning American access, but to make it mandatory to contribute via a “retirement tax.” Take a deep breath, center yourself, and hear me out. The TSP has been in effect since 1988 and is comprised of six individual funds; G, L, F, C, S, and I. The F, C, S, and I are managed via a contract through Blackrock. The G Fund is managed internally by the Federal Retirement Thrift Saving Board and the L Fund is a diversification of all funds. G Fund-Invests in Treasury Securities available only to the TSPL Fund-Lifecycle fund with target dates of 2020, 2030, 2040 and 2050 which is comprised of all funds.F Fund-Fixed income built to track the Bloomberg Barclays U.S. Aggregate Bond Index.C Fund-Matches the S&P 500S Fund-Tracks Dow Jones U.S. Completion Total Stock Market IndexI Fund-Replicates the MSCI Europe, Australia, Far East index.Fees are low at just $0.38 per $1,000 invested, or just 3.8 basis points. Compare this to Vanguard who boasts just 5 basis point costs on a lot of their products. Fund performance has been steady as well.7Levying a minimum 1% tax against gross income earned could provide some cushion for earners of all levels during retirement. Some details of the plan:A minimum 1% tax where the withheld funds are placed in the default “G Fund” of the TSP. This is the government bond fund which holds specially issued notes only available to the TSP.The G Fund provides absolute safety of the principal and typically beats inflation.Individuals could elect to invest in other funds, but half would always go to the G Fund. Individuals could opt to allocate 15% of their wages to the TSP but no more. Account would be tax free going in and coming out.Existing retirement plans would be unaffected. Account could be accessed during an emergency. Withdrawal would be tax-free if amount is replaced within 24 months of withdrawal.Self-employed earners would have equal access and would be required to contribute at least 1% of their gross wages.As is the case currently, funds would not pool like in Social Security, this would be a DC plan in line with a 401(k) style of retirement. At 65 years of age distributions can be taken out but won’t be mandatory until 75. This would not supplant Social Security. It would simply establish a defined contribution plan. So there it is, the bare- bones tenets of the plan, more an idea at this point. The bottom line is that something must be done to develop some form of financial security for retirees. Having 15% of individuals 65 years or older in poverty costs everybody whether it be from Medicaid or your local utility company subsidizing their winter heating bill. A DC plan accessed via the low-cost and conservative TSP and funded by a mandatory contribution could provide a retirement fund for millions who otherwise wouldn’t have one, and it could do so without them even noticing. Resources ................
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