Congress created individual retirement accounts (IRAs) in 1974. Four years later it added 401(k)s. A third variety, Roth IRAs, won approval in 1997. Together the accounts dominate America's private retirement system.
Today we're a hugely unequal society. Updating our private system could reduce inequality, and help make the golden years golden for all Americans.
Let's begin with the millions of workers we're not even giving a chance:
The 1974 bill aimed to provide a workplace retirement plan for all private-sector employees not otherwise covered. Forty-three years later over 70 million workers, mostly low- to middle-income, still lack a workplace option.
They deserve at least two. One would be a broad stock market index fund like the S&P 500. For savers who put safety first, the other would be a bond fund holding only Treasury debt. Enrollment would be automatic with an opt-out provision. Pre-tax contributions would be made via payroll deductions. Gains would accrue tax-free, taxes payable on withdrawal (the same as all current accounts except Roths).
States could set up accounts on their own (as Oregon already has), but Congress could do the job in a single stroke. Both 2008 presidential candidates, Senator John McCain (R-NV) and Barack Obama, endorsed a federal Automatic IRA plan. Obama later included the idea in a budget outline, but it never went any further.
It should have. Well into the 21st century, private retirement accounts should be a worker's right: they should come with the job, period.
Now let's fortify the golden years with smarter retirement account rules.
Congress should lower the age for required minimum distributions (RMDs) from the current 70 1/2 to 65. That would dovetail with the Medicare eligibility age and with common sense and the common good. An aging population is putting Medicare and Social Security in a fiscal bind. Revenues from the new rule should be dedicated equally to the two programs.
Taxable required distributions aren't a penalty; they're a payback to the Treasury for decades of pre-tax contributions and tax-free growth. It would help all seniors if the payback started sooner. (No, RMDs won't exhaust retiree savings. It takes voluntary withdrawals far larger than the required minimums to do that.)
Moving on to fairness, it's important to remember that tax breaks redistribute income. Those who get them count on other taxpayers to make up the revenue shortfall (or else there's simply less to go around). Retirement breaks flow lopsidedly to the well-off. Putting it all together, there's a powerful case for a lower cap on pre-tax 401(k) contributions.
Would anyone lose any sleep if the current $18,000 annual maximum were cut to $10,000, to $7,500? It's one thing to help workers who need help. It's another to over-subsidize the retirement savings of the haves, and lose current tax revenues in the bargain.
Lastly, we need to wind down a fiscal deception.
Congress should remove Roth IRAs, Roth 401(k)s and Roth rollovers (conversions of other accounts into Roths) from the retirement mix. Existing Roths should follow the rules that govern all other plans: required distributions, taxable at ordinary income rates. If that can't happen, at least stop offering Roths and require (tax-free) distributions from current accounts.
Fiscal hawks should cheer the reform, which would guarantee lower federal deficits in future decades. Roth contributions are taxable, so the Treasury takes in more money initially. But the gains are permanently tax-free, leading to multi-billion-dollar losses in the long run (and retirement accounts are primarily about the long run).
Fairness would also get a boost. It's inequitable to exempt Roths from required distributions and taxes on gains.