Private-sector workers would have access to the ultra-cheap, high-efficiency retirement savings system federal workers use under a plan proposed Tuesday by Sen. Marco Rubio (R-FL). That means that one of the simplest ideas for addressing the country’s multi-trillion-dollar retirement crisis now has bipartisan support.
Opening the Thrift Savings Plan (TSP) to non-government workers is just one significant piece of a broader retirement policy Rubio put forth in a speech to the National Press Club. Other elements of the plan, such as raising the Social Security retirement age and curtailing wealthy Social Security recipients’ ability to get back what they paid into the system, are more typical for a conservative lawmaker.
The TSP functions much like 401(k) retirement accounts do in the private sector. Those plans are managed by financial firms that typically charge fees of one or 1.25 percent, sometimes more. That sounds small, but over the course a worker’s career those fees will add up to between $70,000 and $100,000. Higher fees do not correlate with higher investment returns, so workers investing through 401(k)s rather than lower-cost mutual funds will have to stay on the job longer to save enough to retire.
Expanding the TSP is an idea that Center for American Progress (CAP) retirement experts have advocated for in recent years, and CAP’s David Madland said Rubio’s endorsement was a welcome development. “We welcome him and it’s important to have conservative voices supporting this,” Madland said. Given the disparity between the fees that a typical privately managed 401(k) charges and the low overhead costs of the TSP, “you’re probably talking about enabling people to retire three years earlier,” he added.
Opening the TSP to private employees would offer an even starker cost advantage than mutual funds, because the federal system’s costs come in at about 0.01 percent. “If all we did was open up the TSP to everyone,” Madland said, “I would consider that a huge victory. That would dramatically improve retirement security for millions of people.” Congress could go even further by implementing what Madland and his colleagues call Secure, Accessible, Flexible and Efficient Retirement Planes or SAFE Plans. That system would provide many of the same benefits as the TSP and also guarantee workers a certain minimum income in retirement.
Still, these ideas only address one part of the larger retirement picture, and Rubio’s other big idea would do damage to other parts. Experts often describe the retirement system as having three pillars: Social Security, personal savings, and some sort of savings and investment plan through the workplace. Rubio’s proposal to raise the retirement age would needlessly weaken the strongest of those three pillars: Social Security. “It needs some minor tweaks, but that pillar is the strongest and should be strengthened,” Madland said, mostly by ending tax rules that protect the vast majority of wealthy people’s earnings from Social Security taxes. “We can strengthen Social Security and open up the TSP,” Madland said. “The Social Security retirement age is already being raised to 67, and the private sector system is badly broken, so we have to do both.”
Over the past few decades, the workplace pillar of the retirement system has eroded almost entirely as traditional defined-benefit pensions have given way to defined-contribution plans that are riskier, more costly for workers, and less generously funded by employers. And as flawed as it is, the 401(k) system is still only available to about half of the American working population. The rest do not even have access to these high-risk, low-reward options. Opening the TSP to everyone would go a long way toward repairing the workplace pillar and would help combat inequality in the process by shifting workers out of the 401(k) system.
The third pillar is supposed to be personal savings, but Americans are hardly saving at all for retirement. President Obama’s MyRA proposal would help jumpstart people’s savings by giving them access to small risk-free investments in government bonds, but that idea is really just a savings starter kit. Ultimately, it feeds into the same 401(k) system that fleeces those workers lucky enough to have access to workplace retirement savings accounts.
“People don’t have enough money to save,” Madland said. “People’s incomes are stagnant and costs of living have increased. On the private savings side, there’s basically nothing there.”