Senator Marco Rubio’s retirement plan
One of great insights in Thomas Piketty’s “Capital in the Twenty-First Century” is his exploration of how high-income individuals turn their wage income into investment capital, providing a steady income independent of labor for themselves and their decedents. In contrast, those in the middle class and low-income earners especially have to keep on working to earn income, passing little or nothing onto their children and grandchildren. That dynamic also happens on a smaller scale within a lifetime. The inequality in savings for retirement among the vast bulk of Americans is starting cause concern for policy makers
Now entering the discussion is Senator Marco Rubio (R-FL), who will deliver a speech today about retirement insecurity and possible policy solutions, According to the Associated Press, Sen. Rubio will unveil several potential policies, one of which is of particular interest. He will call for opening the federal government retirement savings plan to contributions from all Americans. The plan, known as the Thrift Savings Plan, is a well-designed defined-contribution 401 (k) plan with low fees that offers savers a menu of index funds in which to invest.
Sen. Rubio’s proposal interesting not only in light of who else has called for opening the program but also because it would help mitigate the inequality in saving for retirement. According to estimates from the Economic Policy Institute, households with earnings in the top 20 percent of income distribution held an average of more than $300,000 in retirement savings in 2010, the last year for which complete data are available. This compares to average savings of only $7,543 for households with earnings in the bottom 20 percent of income.
This vast inequality in savings is because low-income workers mostly lack access to a savings plan at work and when they do often don’t readily participate. The inequality in access to plans is startling. For workers in the bottom third of earnings, only a third work for a company that offers a retirement plan. That percentage jumps to 70 percent for workers in the top third of earnings. Sen. Rubio’s call to open the Thrift Savings Plan to the public would drastically reduce this inequality as any worker would be able to contribute to the plan. Yet the problem of actual participation would still be there. Auto-enrollment into plans has been successful in the past, so policymakers including Sen. Rubio might well consider that option.
Exploring whether and how wealth inequality and economic growth are linked is central to Thomas Piketty’s “Capital in the 21st Century,” but that’s probably not the reason Sen. Rubio is championing the Thrift Savings Plan option as a policy tool to fight wealth inequality. Nonetheless, the Florida Republican is firmly in today’s Piketty zeitgeist with his new policy proposal.