In his state of the union address last week, President Trump proposed expanding access to 401(k) plans to help the half of the U.S. workforce that now has no retirement savings. If actualized, his plan could take a major step toward creating a universal retirement savings system proposed by my organization in 2018.
“Half of all of working Americans still do not have access to a retirement plan with matching contributions from an employer,” Trump said. “To remedy this gross disparity, I’m announcing that next year my administration will give these oft-forgotten American workers, great people, the people that built our country, access to the same type of retirement plan offered to every federal worker. We will match your contribution with up to $1,000 each year, as we ensure that all Americans can profit from a rising stock market.”
To succeed, Trump’s proposal must meet two fundamental requirements: funds to save and invest and accounts overseen by a fiduciary. The millions of workers with no money left over from their paychecks after covering the cost of living need more than just access to a retirement account — they also need money to put in that plan, week by week and month by month.
This is why, without congressional action, most low-income workers will likely still be left out.
Trump’s proposal is only to match funds put in accounts by employees. Some sources report that the administration’s plan, still being fleshed out, would utilize a new “saver’s credit” created in the Secure 2.0 Act of 2022, which will soon be available to low-income workers with no tax liability. It’s a good start, and it could easily be modified to put a few hundred dollars each year into accounts for all workers.
In last year’s tax and spending legislation, Congress met both tests in a limited way when it created “Trump Accounts” for newborn Americans born during the president’s second term, promising to seed each with $1,000.
Under current law, employee contributions to retirement accounts are massively subsidized by the federal government. The lion’s share of benefit from traditional tax-deferral and tax-free gains in Roth accounts goes to higher-income workers. Most low-wage workers get little or no benefit from this tax expenditure.
U.S. retirement saving policy over the last 50 years could be a textbook case of a rigged system, in which the wealthiest and most powerful have quietly used political leverage to corral trillions of dollars and exacerbated wealth inequality. An analysis published by the Society of Actuaries shows that the distribution of tax subsidies in the current U.S. retirement savings system is grossly unfair. It plays a significant role in widening the wealth gap, while providing no benefit to and possibly even harming a major segment of the workforce.
A national retirement savings system that provides every American worker with a modest tax credit to save for retirement could improve economic security, help people prepare for old age, and facilitate saving for emergency expenses. This type of inclusive capitalism would make every American worker an owner of assets generating income. Such a system could be funded with a relatively small sacrifice from high-income earners without increased federal spending.
Under our proposal, Congress would task an independent board with setting up a national system offering retirement savings accounts for everyone issued a Social Security number. Such accounts would not replace Social Security or current employer-based retirement savings but rather complement the existing systems.
The board would have fiduciary duty for managing the accounts, which would be particularly helpful to low-wage workers and to those whose employers offer no retirement plan. The accounts would be available to receive funds throughout a person’s work life. Upon retirement, the funds could be rolled into an IRA.
The federal government would make modest contributions to these accounts — optimally, the lower someone’s wage, the higher the contribution should be. Workers could be offered basic financial education and would have some latitude to choose from a basic menu of investment options similar to what federal employees have.
To accommodate the needs of low-wage workers, accounts could be designed with flexibility to allow some borrowing for emergencies, such as getting one’s car fixed to get to work or covering medical expenses. Most of the balance, however, including government contributions, should be shielded from early withdrawals.
Today, almost half of Americans have no net assets and little or no retirement savings. Millions of workers have no money to save and no retirement account to put it in anyway. Meanwhile, Americans at the top of the economic heap get generous tax breaks for retirement savings — and the appreciation of these assets widens the wealth gap.
The president’s proposal could be a major step toward creating a more inclusive form of capitalism and retirement security. But getting all workers into retirement savings plans, particularly low-earners, remains a formidable challenge that will demand both political stamina and technical expertise.
Karl Polzer is founder of the Center on Capital and Social Equity.
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