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How to guarantee retirement income for people without savings

Adam Shapiro
·3 min read

The bottom 25% of American households have a median net worth of $310 and the bottom 50% own less than 2% of total U.S. wealth, according to former Trump administration economic advisor Kevin Hassett.

"The unfortunate fact that most Americans lack adequate wealth and retirement savings has been a consistent reality in the U.S. economy for decades," Hassett wrote in a new paper that proposes a simple way to boost retirement savings for the middle class and working poor.

"What If Low-Income American Workers Had Access to WealthBuilding Vehicles Like the Federal Employees’ Thrift Savings Plan," is a proposal to allow millions of working Americans to enroll in a plan similar to the U.S. government retirement Thrift Savings Plan or TSP.

It's a defined contribution retirement plan, for federal employees, very much like a private sector 401(k) in which Uncle Sam matches up to 5% of eligible contributions.

"It's the best policy the federal government has ever come up with," Hassett told Yahoo Finance Live. "I think that if we were to take the TSP and make it available to everybody, and have some match, get the thing going, then it's going to work. We have enough evidence that we can really believe it's going to work."

The key for it to work, he points out, is to automatically enroll Americans in a retirement plan that includes an employer or federal government matching contribution.

Hassett and co-author Teresa Ghilarducci, a retirement expert and economist at The New School, cite a Congressional Budget Office study that found when federal employees were automatically enrolled in TSP "those with a high school degree or less increased their participation from 79% to 95%, while those in the bottom one-third of earnings increased their participation from 74% to 95%."

Hassett said the problem is most working people don't have access to a long term retirement savings plan. "And I think this proposal to basically let all Americans, especially low- and middle-income Americans, have access to Thrift Savings Plan could fundamentally alter both the welfare of people at the bottom, but also the stability of society," he said.

Retirement security for millions

The TSP already has 6 million people enrolled with more than 3 million still working. Hassett and Ghilarducci propose enrolling millions more with a government match and the potential for a private employer match as a way to expand retirement savings.

"Our estimates suggest that for the average household in the poorest 25% of the wealth distribution, 40 years of participation in the TSP could provide them with retirement account balances anywhere between $138,000 and $610,000 before fees and taxes, depending on the level of the government match and the rate of return on investment."

Their model assumes average annual returns between 3% and 7%. It would cost the federal government $60 billion a year if it matches contributions up to 3%. That contribution expense would rise to $100 billion a year if the matching contribution were 5%.

Hassett who jokingly calls himself a "knuckle dragging right winger" predicts Republicans and conservative Democrats would support his plan and the additional costs to keep millions out of poverty when they stop working.

"Because if everybody's got a stake in the game and everybody's happy, when say markets are going up, that we're all kind of pulling in the same direction," it would increase the retirement security of millions of low-income Americans, he said.

Hassett pointed out the plan has an added benefit — it would boost the overall wealth of low-income Americans and close the wealth gap.

Adam Shapiro is co-anchor of Yahoo Finance Live 3pm to 5pm. Follow him on Twitter @Ajshaps

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