Sunday, June 01, 2008

Should retirement strategy focus more on moderate income workers, and cut back on tax-free matches?

Okay, maybe it isn’t so bad that people retire long before their life expectancies, according to a “Financial Futures” column by Martha M. Hamilton in The Washington Post today, on the Business front page, F1. In a column called “A System that Needs to be Retired: Saving the Savings System,” (link) the writer reports on a plan by Theresa Ghilarducci (“When I’m Sixty-Four” The Plot Against Pensions and the Plan to Save Them”). She would require everyone to save 5% of their incomes in funds that would be professionally managed, up to a max (of about $100000 a year). She would give each person a $600 refundable tax credit and eliminate the pre-tax benefit for 401K contributions and matches by employers. Apparently this plan would supplement social security rather than “privatize” it.

The argument is that such a scheme helps moderate income workers save properly. Current plans emphasizing pre-tax matches by employers for 401K “defined contribution” plans benefit high income professionals and profitable companies. Big surprise, that’s just capitalism! If you make it feasible for people to really “retire” in their 60s, unemployment will be lower.

I’ll say this, I’m 64, just like that baby in the 1982 movie “The World According to Garp” (as in the title of the Ghilarducci book above), and for me, the matching contributions some years ago were a minty lifesaver. When the company froze its defined benefit pensions, it increased the pre-tax 401K match. Of course, you can say, tax policies may be favoring the freezing of pensions just as demographics are.

Ms. Hamilton holds "financial features" discussions at the Post website; the next one appears to be scheduled for June 3 (look up her name on the site for events).

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