NCPA - National Center for Policy Analysis


July 25, 2005

Adding voluntary savings through salary deductions to President Bush's proposed personal retirement accounts would substantially strengthen this reform. After the Social Security surpluses end in 2017, a voluntary savings plan would continue to add to personal retirement accounts, providing a more secure future retirement, says Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan.

The key to the success of such a voluntary add-on plan is to combine automatic enrollment with the ability of each individual to opt out if he or she does not want to participate. Experience with the 401(k) plans of private firms shows that this combination of automatic enrollment with the right to opt out leads to participation rates of 80 percent or more even when there are no employer matching contributions:

  • When employees are given the choice of whether to participate in a corporate 401(k) plan, it is common for fewer than half to sign up.
  • But when told that the company will deduct some amount from their pay and deposit it in a 401(k) plan, the participation rate jumps to 80 percent or more even though they have the right to opt out and keep their full earnings.
  • Experience shows that the "default option" -- whether you are automatically enrolled unless you decline, or automatically out unless you enroll -- has a powerful effect on what individuals choose to do.

This feature would also increase national savings which would reduce our dependency on capital from abroad; therefore, our trade deficit would shrink.

Supplementing the traditional system with investment-based personal retirement accounts financed by projected surpluses and voluntary savings would eliminate the need to increase Social Security taxes while providing a secure source of income for future retirees, concludes Feldstein.

Source: Martin Feldstein, "Saving Social Security," Wall Street Journal, July 15, 2005.

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