Third Way’s First 100 Days: Retirement Security Edition

As we’ve clarified, speaking as ever purely for myself and not as an institutional position of CAP/AF, Third Way’s First 100 Days agenda strikes me as pretty weak tea. For starter’s here’s their retirement security agenda:

Rebuild retirement wealth

  • Federal 401(k) match. Provide federal matching funds to 401(k) and IRA contributions, up to $1,000 per worker per year.

  • Temporary tax exemption for 401(k) withdrawals. Provide a temporary exemption from federal income taxes for the first $15,000 in 401(k) withdrawals for seniors who are withdrawing from their accounts.
  • Streamlined consolidation of 401(k) accounts. Nearly half of all workers who switch jobs cash out their 401(k)s. Create a streamlined, automatic roll-over process for workers with multiple 401(k) accounts or who are switching jobs to avoid the problem of “cash out.”
  • Federal 401(k) contribution insurance. For most workers today, a 401(k) account is the centerpiece of their retirement security and savings. Yet
    workers approaching retirement are unprotected from having their investments decimated by market shocks. Create an entity modeled after the Federal Deposit Insurance Corporation that would protect the principal contributed to workers’ 401(k) accounts until a worker retires.

The consolidations thing seems like a fine idea, although “create a streamlined, automatic roll-over process” is more of a placeholder than an actual policy. And I’m not sure I fully understand the 401(k) insurance proposal — how could it be modeled on the FDIC? 401(k)s don’t, as far as I’m aware, suffer from “runs” in the same way that bank deposits do. And a guarantee of this sort seems like it could create a substantial moral hazard problem in a way that’s not really true of bank deposits. It’s conceivable that this is a good idea, though, but you’d want to know more details — details that don’t seem to be available.

Federal matching funds for 401(k) and IRA contributions seems like a pretty ill-considered idea. In the short run, if this succeeded in boosting short-term savings rates it would have a contractionary impact on the economy and make things worse. In the long run, the idea of federal matches to boost savings has some merit, but this is an odd way of implementing it. In particular, it would be pretty regressive — an additional subsidy for families already sufficiently well-off to be saving money that does nothing for the economically struggling. CAP has, by contrast, proposed a Universal 401(k) approach that seeks to target aid to the neediest (for whom Third Way would do nothing) while not extending additional help to the wealthiest Americans.