By Martin Wolk Executive business editor
updated 6/6/2005 12:17:03 PM ET 2005-06-06T16:17:03

President Bush’s plan to reform Social Security has sparked a bitter party-line battle, but partisans on both sides of the aisle should be able to agree on one thing: Americans need to save more for retirement.

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Now there is new evidence to demonstrate that even the poorest wage-earning Americans can be induced to set aside money for their golden years if they are offered an easy way to do it and financial incentive.

The problem is substantial: Experts estimate that about one-third of workers entering their retirement years have no effective pension or savings and will rely almost entirely on Social Security.

And regardless of where you stand on the Social Security debate, “Social Security was never supposed to provide for retirement completely,” said Peter Orszag, a senior fellow with the Brookings Institution and director of the new Retirement Security Project.

The facts are clear: As the vast baby boom generation prepares for retirement, all three legs are wobbling on the financial “stool” that traditionally supports Americans in their old age: Social Security, pensions and savings.

Even defenders of the current Social Security system admit the system has substantial unfunded liabilities and likely will be worth less to future generations of retirees.

“Social Security is just not going to be as much of a mainstay in the future as it is today,” said Alicia Munnell, a professor of management at Boston College and director of its Center for Retirement Research.

As for cash savings, it has virtually disappeared in a nation where consumers rely heavily on debt to finance a lifestyle that remains barely within their means. The personal saving rate, one measure of how effectively wage-earners set aside money for retirement and other future expenses, has plunged to well under 2 percent of disposable personal income in recent years, compared with 8 to 10 percent in the 1960s, ‘70s and ‘80s.

And the promises of lifelong pensions offered in past decades by big employers are ringing hollow to many today. Just ask workers at United Airlines, the latest company to stick its employers with sharply reduced benefits by defaulting on its pension obligations.

Changing pension system
Today, of course, most companies have shifted the burden of retirement saving to their employees through 401(k) plans. Most employers offer a generous matching contribution, but it remains up to workers to enroll, make sufficient contributions, allocate their assets and manage their money through their working life and retirement.

“What we have found is that people make mistakes every step along the way,” Munnell said.

Perhaps the biggest mistake people make is that 25 percent of eligible workers fail to participate, “leaving money at the table” in the form of employee-offered matching funds. Other mistakes include failing to diversify, failing to rebalance, and withdrawing the money before retirement.

Over the past several years, so-called behavioral economists have conducted a series of experiments showing that people make better choices when they are guided by automatic enrollment and asset allocation programs. Employees seem more likely to contribute – and to contribute higher amounts – when it takes more effort to opt out of a retirement program.

But what about workers -– perhaps more than 50 percent of private-sector employees -– who have no pension coverage at all?

A recently concluded experiment devised by researchers at the Retirement Security Project and carried out with the help of tax giant H&R Block points the way out of the tangle that threatens to consign many workers to an old age of financial hardship.

The study focused on 15,000 taxpayers who showed up at H&R Block offices in the St. Louis area in March and April to fill out their tax returns. At some point during the process, these mostly lower-income taxpayers (average income for the company’s customers is $27,000) were offered the chance to open an individual retirement account through a streamlined process developed by H&R Block.

One-third of the taxpayers were offered a 50 percent match up to $1,000, one-third were offered a 20 percent match and one-third were offered no match. The results: 17 percent of the group offered the higher match rate opened accounts, compared with 10 percent at  the lower match rate and only 3 percent in the no-match group. The taxpayers who got matching funds invested about $1,300 of their own money, compared with $850 for the taxpayers who got no match.

The results seem intuitive, but Orszag said it was the first time a randomized study had shown a direct correlation between higher match rates and higher participation in a savings program.

If it seems surprising that only 17 percent of tax filers opened a retirement account even when offered a 50 percent match, Orszag points out that most customers in the study probably went into the tax office with little intention of doing anything other than finding out how big their refund would be.

“It would be a major public policy achievement if we got the overall take-up right up to 17 or 20 percent of the population,” he said.

H&R Block vice president Bernie Wilson said the company’s clients face significant obstacles to investing and are typically suspicious of banks and brokerages. Nearly half of the company’s more than 16 million clients have no bank accounts or are considered “marginally banked,” facing high minimums and stiff fees that keep them from getting started on a saving program.

“And these people are working, getting paid 26 times a year or more and going to the check-casher and paying 4, 5 or 6 percent fees and not earning interest,” Wilson said.

H&R Block sees a market opportunity to offer additional financial services to these workers, deepening a relationship with customers who otherwise would have only one transaction a year with the company.

Profit motive
“We’re business people and we’re obviously a for-profit entity,” he said. “We have many millions of tax clients who are unbanked and are marginally banked and still others who are not saving. To the extent that we can offer services that improve loyalty and offer services that create a new financial services relationship with some level of margin obviously we are interested in that.”

The H&R Block study also suggests how the federal government could improve one program that is aimed at encouraging lower-income wage-earners to save for retirement: the Retirement Saver’s Credit.

This 3-year-old program offers a 50 percent tax credit, up to $1,000, for taxpayers who set aside money into qualified retirement accounts and earn no more than $30,000 for joint filers. One shortcoming of the program is that many wage earners in that tax bracket have little or no federal income tax liability so cannot take advantage of the tax credit unless Congress acts to make it refundable.

Another problem -- the Saver’s Credit is scheduled to expire next year.

Wilson said H&R Block uses its tax software to identify federal programs that might benefit its clients, including the Saver’s Credit, food stamps and dozens of others. Over the past three years, the company has helped more than 3.6 million of its customers get the Saver’s Credit, or about one-quarter of the total credits claimed.

In testimony to a Senate subcommittee last month, Wilson urged lawmakers to extend the credit program and consider making it refundable, which would offer a saving incentive to wage earners even if they pay no federal income tax.

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