The Way to Save

The New York Times
The Way to Save

Unless new policies are enacted soon, many Americans are destined for a deprived old age. Some 70 million people, nearly half of the work force, have no employer-provided savings plan of any kind. Over all, half of American households have saved little or nothing for retirement.

The response from the Bush administration has been off the mark, at best. For the fourth time in a row, President Bush's annual budget calls for creation of two new kinds of tax-sheltered accounts that would mostly benefit people who already save megabucks every year. Meanwhile Mr. Bush's perennial savings proposal for low- and moderate-income earners is routinely ignored on Capitol Hill. But even if it were taken seriously, it's too limited to reach most of the people who need to save more.

There is a better way. In fact, the groundwork has already been done. Last week, researchers from the conservative Heritage Foundation and the liberal Brookings Institution released a joint proposal to make saving for retirement universal (available at www.retirementsecurityproject.org). The centerpiece of the plan is the automatic individual retirement account, or auto-I.R.A. Employees who are not covered by an employer's savings plan would be allowed to divert a portion of each paycheck into this vehicle. All but the smallest employers would be required to offer direct deposit for their workers' contributions, and all employers — large or small — would get tax breaks for doing so.

Groundbreaking research on savers' behavior is built into the auto-I.R.A. design. Studies have shown, for instance, that automatically enrolling employees in a plan — unless they opt out — dramatically increases participation. And if people are asked whether they want to save, most say "yes." Auto-I.R.A.'s would be set up using one of these two effective approaches, depending on what is most convenient for the employers, instead of leaving it up to workers to take the initiative of enrolling.

Government could play a vital role by matching employees' auto-I.R.A savings — say, dollar for dollar on the first $500 that a worker contributes. Offering a match is a proven way to increase both participation and the amount that employees are willing to save. In contrast, offering tax deductions for savings — the government's preferred incentive — has been of little or no value to low- and middle-income savers. Lawmakers could offer an auto-I.R.A. match for far less than what it would cost to extend the Bush tax cuts.

In a recent poll of registered voters, 83 percent favored auto-I.R.A.'s. Americans are waiting for leaders who will take them where they want to go.