Why Economists Are Looking Towards This New Retirement Plan

This account can give you retirement income for the rest of your life.

When it comes to saving for retirement, there are many options available. However, one option that's gaining traction among economists is the guaranteed retirement account (GRA). GRAs offer a secure and predictable way to save for retirement, and they can provide peace of mind for anyone who's worried about their financial future. Here's why economists are interested in GRAs.

What is a GRA?

A GRA is a retirement savings proposal for all employees and even self-employed workers who are not participating in an equal or better retirement plan through their work. It is a hybrid of a defined contribution plan, such as a 401(k) or IRA, and a defined benefit plan (pension). It is similar to a 401(k) in that both the employee and employer contribute to it, and similar to a pension in that it provides employees with guaranteed income for life once they reach retirement age.

There are several different types of GRA proposals out there. In one type, the federal government oversees it by providing every American with one in addition to Social Security. The federal GRA would be administered by Social Security to eliminate fees. But a state GRA would allow private sector employees to open an account in a state-level public retirement system. Regardless of who manages it, the proposals require every worker to pay 1.5% or 2.5% into the account and then employers would match the worker's contributions so the total is 3% to 5%. Self-employed workers would contribute the full amount themselves. The account would need to grow at 2% to 3% above inflation after all costs.

The benefits of a GRA

One of the major benefits of a GRA is that it provides individuals who retire at age 62 or later with a guaranteed stream of income throughout their retirement years. With other types of retirement accounts, such as 401(k) plans or IRAs, there is no guarantee that investments will perform well enough to provide individuals with an adequate amount of money for their retirement years. However, with a GRA, regardless of how investment markets perform, individuals are guaranteed an income stream throughout retirement.

GRAs feature built-in safeguards against market volatility and other risks associated with retirement savings plans. This can help alleviate some uncertainty when planning for your future. The amount you receive is based on how much you have in the account and regularly adjusted for inflation. According to the Economic Policy Institute, an average employee would increase their Social Security benefit by a third if using the 3% contribution amount.

Contributions would start as soon as one starts working, and in one proposal those who earn a salary of less than $40,000 would pay nothing out of pocket. The employer would still make the 1.5% contribution and the plan would provide a tax credit equal to the 1.5% of pay (up to $600 per year). If the worker changes jobs, they would keep contributing to their GRA at their new job. However, if the new job offers a retirement plan that is equivalent to or better than the GRA, employees could opt to join that instead.

GRAs provide an effective way for employers and employees alike to save for retirement and provide peace of mind during these uncertain times. Economists believe that GRAs offer an excellent alternative to traditional savings plans due to mobility during job changes and built-in protection against market risks. While the GRA idea is still in a proposal state, studies show that a majority of Americans across all age groups and political parties support a GRA plan. For example, in a 2018 nationwide poll, 78% of Democrats and 77% of Republicans expressed support for it. Since so many Americans are not ready for retirement, the GRA plan could help level the playing field so that all workers, regardless of who their employer is, have the opportunity to save for retirement.