Oct. 28, 2008 — -- When it comes to how we spend and save, borrow and lend, nothing in this nation will ever be the same.
I can't tell you how the financial crisis will be solved, when the Dow will return to 13,000 or if home prices will recover anytime soon. But the events of the past two months make it clear our national money habits are in for big changes.
Given that reality, there's one proposal you might want to keep an eye on. A recommendation to shake up the nation's 401(k) system is gaining traction as workers and retirees gape in horror at their investment account balances.
"Four weeks ago this plan didn't have a chance," conceded its author, Teresa Ghilarducci.
Suddenly, things have changed. Ghilarducci's proposal to create what she calls Guaranteed Retirement Accounts is gaining attention in Washington as the nation grapples with the issue of retirement security in the wake of a 40-percent-plus drop in the U.S. stock market this year.
"These last three weeks people are learning their 401(k) plans can go down," said Ghilarducci, an economist at the New School for Social Research in New York.
Called to testify before Congress earlier this month, Ghilarducci's ideas are gaining wide exposure nearly a year after she published a policy paper on the subject. She followed up that paper with a book published in May, "When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them."
Her proposal calls for knocking down the 401(k) plan system and replacing it with a government-run pension plan funded by employee contributions. Participants would be guaranteed an inflation-beating return and a lifetime stream of income.
"What people want from their pensions is guaranteed income for life," Ghilarducci said in an interview Monday.
Guaranteed Retirement Accounts
Here are the basics of her proposed Guaranteed Retirement Accounts:
• Employees would make mandatory contributions equal to at least 5 percent of their earnings. Workers could contribute higher amounts if they wish.
• Those contributions would be offset by a $600 federal tax credit each participant would receive.
• As with a 401(k) plan, workers would have individual accounts they could track. The balance of each account would depend on each worker's contributions and income level.
• The Social Security Administration would handle account management, and the Thrift Savings Plan -- a well-regarded retirement plan for federal employees -- would manage the money.
• Participants would be guaranteed a fixed rate of return that exceeds inflation by 3 percent. For instance, if inflation stood at 2 percent, the worker would earn 5 percent; if inflation reached 3.5 percent, the worker would earn 6.5 percent. Participants could receive an inflation-beating return above 3 percent if the government's investment returns were high enough.
• At retirement, participants' account balances would be converted into a lifetime stream of income that adjusts for inflation. There would be options to take partial lump sum payments, opt for lower payments in return for survivor benefits and, upon death, leave a portion of a financial account balance.
The intent of the plan is not to replace Social Security. Rather, Guaranteed Savings Accounts would supplement Social Security, Ghilarducci said.
She estimated a full-time worker retiring after 40 years could expect a benefit equal to about 25 percent of pre-retirement income. That would be on top of Social Security benefits.
The portion of Ghilarducci's plan that has drawn the greatest criticism is her suggestion to eliminate the tax breaks received for contributing to a 401(k) plan or an IRA.
Last week, conservative radio talk show host Rush Limbaugh pilloried her ideas, but Ghilarducci said Limbaugh got some of the facts of her proposal wrong, including that the guaranteed rate of return would be 3 percent above the inflation rate, not a flat 3 percent return.
Ghilarducci now talks about maintaining some level of tax-free contributions, maybe up to $5,000 a year, to IRAs or 401(k)s. That's more than most workers contribute to a retirement plan, she said, and would only cost the federal government $25 billion a year compared to the $80 billion a year contribution levels cost the federal Treasury now.
Ghilarducci said she's not "anti-stock market" but, rather, against 401(k) plans in their current iteration. She called the 401(k) "a tax shelter with very bad elements, namely hidden fees and very costly products."
The retirement scheme simply does not work, she said.
"If current trends continue, poverty rates among the elderly will increase and middle-class retirees will find that their retirement income will not pay for the lifestyle they achieved while working," she wrote in her original policy paper.
Ask the retirees you know if they've begun to worry about the same trends as the Dow has fallen more than 20 percent in less than a month. I think they might want to hear more about Guaranteed Retirement Accounts.
I'm not ready to embrace every aspect of Ghilarducci's plan, but it's a plan that needs to be part of the national discussion as we deal with the fallout from easy credit, risky derivatives and a stock market decline that has devastated the retirement fortunes of millions.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at email@example.com.