President Obama and Vice President Biden laid out a package of middle class incentives and proposals Wednesday, including a child-care tax credit increase and limiting student loan payments to 10 percent of a graduate's income after factoring in a basic living allowance.
Intriguing ideas. But there's another White House proposal that's likely to get support from conservatives and liberals alike: so-called "opt out" retirement accounts for Americans who currently lack an employment plan, like a 401(k), from their employers.
Opt out sounds like a subtle variant of opt in programs, which account for three-quarters of American workplace retirement programs. But it makes a powerful difference, according to Cass Sunstein and Richard Thaler, authors of the book "Nudge." If people have to choose to participate in a savings program, fewer will sign up than if they have to choose not to participate.
"We have lots of evidence that it’s a method that works extraordinarily well at overcoming inertia, laziness, mindlessness, and all the reasons that many people just never get around to joining a 401(k) plan," says Mr. Thaler, an economist at the University of Chicago. And by still offering a choice to opt out, it doesn't impinge on the many "responsible reasons why someone might not want to be saving on retirement, especially when they are young," he adds.
One 2007 Harris poll found that 98 percent of workers who opted for their employers automatic enrollment plans were glad they had the option. More importantly? Four in five who opted out also said they were glad to have the option, according to a December 2009 research paper from two economists at the Urban Institute.
Incentives for employers to create opt-out enrollment in retirement plans came into being with the Pension Protection Act of 2006. But so far, there's no program for those in workplaces without employer-sponsored savings plans.
The automatic IRA would work something like this. Employers will enter a centralized database to connect with a bank or mutual fund group, for example, to manage the funds that get automatically deducted from their paycheck. It will be up to employers to determine whether they will allow individual employees to select their own managers. The cost to the employer to set up the system is marginal, says David John, a senior fellow at the conservative Heritage Foundation and a member of the bipartisan Retirement Security Project. By creating a simplified, central system, the program aims to overcome another aspect of trouble with getting Americans to save: a dizzying array of choices.
"The more options people have, the more likely they are to do nothing. They throw up their hands in bewilderment, they say 'Well this is complicated. I’ll take care of it tomorrow,' and tomorrow isn’t any different from today," says Barry Schwarz, a psychologist at Swarthmore University and author of the "Paradox of Choice," which details how increased options can lead to more paralysis than freedom.
In a time when the economy is in the tank, what's the government doing encouraging consumers to sock money away? A little austerity won't hurt, Mr. John says, and will build in resilience during future downturns.
"We’ve been grossly undersaving. You really need to have a cushion," he says. "This is a case where hypothetically you might reduce consumption by a small degree. Instead, we think this is where the worker puts money away for retirement and that makes them and us better off when they do retire, because if they don’t have this money put away they are going to be depending on taxpayer funds."
And unlike healthcare or stimulus spending, the middle-class proposals in general and the automatic IRA specifically get support from the left and the right.
"We can’t think of anything now besides motherhood and apple pie that gets bipartisan support," Thaler says. "It’s not clear who should be against giving the middle class a way to save for retirment when 40 percent of their retirment savings were wiped out by the stock market crash."