Social Security and Personal Savings: Complementary Roles

Social Security and private savings have been viewed by many as two opposite sides of a coin: either America has a Social Security system where the government collects taxes and pay benefits or America has a privatized Social Security system where personal savings accounts are privately invested. The result is an ideological debate over Social Security privatization instead of a discussion about how to make retirement more financially secure for more Americans.

The National Academy of Social Insurance (NASI) – a nonpartisan organization devoted to promoting understanding of America’s social insurance system – has recently published a paper authored by the Initiative on Financial Security highlighting this either/or fallacy. The paper argues that financial security in retirement requires both private retirement savings and the social insurance provided by Social Security.

Social Security and Private Savings: Complementary Roles seeks to refocus the debate over Social Security and offers two proposals – America’s IRA and Security Plus Annuities – to strengthen the private savings side of the equation.

Child Accounts: The California Advantage

Cities and counties in the state of California have a unique opportunity to advance a Child Account policy, according to a new report from IFS. Child Accounts: The California Advantage explains how local governments in California could use an existing financial instrument – known as Coogan Trusts – to create a Child Account program.

Child Accounts would provide every child at birth with a $500 private investment account that would -- through additional contributions, matching funds for low- and moderate-income families, and compounding interest – give every child a financial springboard into adulthood at age 18, helping to pay for anything from a first home to a college education. Coogan Trusts provide the ideal platform for Child Accounts in California, and the state’s financial services sector already possesses the infrastructure to accommodate the proposal.

To read more about how Coogan Trusts could be used to advance Child Accounts in California, click here.

Storm Clouds Ahead for 401(k) Plans?

A recent Supreme Court decision has wide-ranging implications for the future of 401(k) plans and could, according to IFS Policy Director Pamela Perun, threaten efforts to entice more employers into offering retirement plans.

In a recent paper for the Urban Institute– “Storm Clouds Ahead for 401(k) Plans?” – Perun explores the implications of the Supreme Court decision in LaRue v. DeWolff, Boberg & Associates and discusses whether that decision will undermine recent efforts in Congress.

In 2006, Congress passed the Pension Protection Act (PPA). Designed to encourage more employers into offering retirement plans, the PPA was seen as step forward in ensuring financial security for the many employees working without pension protection. Yet in February 2008, the Court handed down, in the unanimous decision of LaRue, a ruling that threatens to weaken the efforts of the PPA, by possibly increasing employer liability.

In the paper, Perun dissects the repercussions of this ruling on retirement plans, and offers a path forward to guaranteeing all American workers a financially safe and secure retirement.

Read the report here.

Mensah Participates in NewTalk.org Conversation on Entitlements

Lisa Mensah, Executive Director of the Initiative on Financial Security, participated in a three-day virtual panel discussion held by NewTalk.org on the state of the nation’s entitlement programs.

The discussion – “Can we afford our entitlement promises? How close is the cliff?” – involved several leading policy experts in addition to Mensah, including president of the New School and former U.S. Senator Bob Kerrey; David Walker, President of the Peter G. Peterson Foundation and former Comptroller General of the United States; and Robert Berenson of the Urban Institute.

While the conversation focused on the state of America’s entitlement promises, the topic of retirement security dominated much of the debate. Mensah argued that the unique importance of Social Security lies in its status as a universal program of insurance where everyone shares responsibility. But, Mensah added, there is a need for personal savings that would supplement, not replace, Social Security. She argued that a top priority should be to build “a first-class savings system for all Americans" and noted that the “system doesn’t always encourage people to save. Some 50% of workers aren’t even offered a retirement account.”

While proposed solutions to the entitlement situation differed greatly, each participant confirmed the need for greater public engagement in creating more solvent and efficient entitlement programs.

To read more of the discussion, click here.

U.S. PERSONAL SAVINGS RATE +1.3 percent

Source: Bureau of Economic Analysis;data for September 2008.

Opportunities Available For Native American Child Accounts

This past June, The Native Nations Institute for Leadership, Management, and Policy (NNI) at the University of Arizona brought together a panel of leading experts to discuss the obstacles and prospects for future asset growth initiatives within Native American communities. Elena Chavez Quezada, Senior Associate at the Initiative on Financial Security, was there to explain the unique opportunity for Native American communities to implement a policy of Child Accounts.

As more Native communities take control of their Tribal trust funds they are increasingly opting to disperse the funds amongst their members through a system of “per capita distributions.” As Chavez Quezada pointed out, Child Accounts would offer a structured financial vehicle to house the “per capita” assets until children turned 18 – and would at the same time encourage fiscal responsibility and future financial security.

To view the roundtable discussion, click here.

To read more about Child Accounts, click here.

IFS Participates in CAP Panel on "Protecting the Nest Egg"

In July, IFS Policy Director Pamela Perun participated in a panel of leading policy experts convened by The Center for American Progress to discuss the state of America’s retirement security in light of the slumping economy. Perun argued for a fundamental shift in the way Americans view savings, starting at birth and continuing throughout the lifecycle.

Perun outlined the four proposals included in Savings for Life: Child Accounts, Home Accounts, America’s IRA, and Security Plus Annuities. Stressing the importance of universality, simplicity, matching incentives, and private sector involvement, Perun underscored the importance of a comprehensive savings society, both for the financial security of individual Americans and for the overarching health of the United States economy.

To view the panel’s discussion, “Protecting the Nest Egg in the Turbulent Economy,” click here.

The UK Child Trust Fund: A Successful Launch

IFS and the UK’s Institute for Public Policy Research (ippr) have published a report detailing and analyzing the initial years of the UK Child Trust Fund initiative. The program provides every child born in the UK with a private investment account, including a £250 ($500) starter contribution from the government. Similar to the IFS Child Account proposal, the account aims to give children a financial springboard into adulthood at age 18, helping to pay for anything from a first home to a college education.

The report shows that:

• 75 percent of parents open an account for their children;
• 30 percent of accounts opened by parents receive additional contributions;
• Low-income families contribute a higher percentage of their income to their children’s accounts than higher-income families; and
• Equity investing in the private sector is popular with parents and workable for private financial institutions.

IFS Executive Director Lisa Mensah noted, “The early success of the Child Trust Fund is inspiring. As a country with a persistently low personal savings rate, we in the U.S. can learn a great deal from the successes and challenges of this program.”

To read the full report click here.