Re-Envisioning Retirement Security: Guaranteed Retirement Account Plan

The following proposal was presented by Teresa Ghilarducci at the Re-Envisioning Retirement Security Conference on October 21, 2009.

The Guaranteed Retirement Account

The Guaranteed Retirement Account (GRA) proposal mandates a contribution of five percent of earnings for all workers – evenly divided between an employer contribution of 2.5 percent and a participant contribution of 2.5 percent. Under the GRA the federal government through the Social Security Administration would administer the plan and the Thrift Savings Plan would manage the pooled assets.  Contributions to Guaranteed Retirement Accounts would be deducted from payroll. The 2.5 percent employee contributions would be offset by a $600 refundable tax credit provided to all participants. Part-time workers, caregivers of children under age six and those collecting unemployment benefits would be eligible for the tax credit.

Mandatory contributions would be made by employers and employees up to the Social Security earnings cap. Employer and employee voluntary contributions could be made on top of the mandatory contributions, but they would not be tax-deductible.  The contributions of husbands and wives would be combined and divided equally between their individual accounts. 

The plan would provide for a guaranteed real three percent annual rate of return adjusted for inflation.  If actual investment returns are consistently higher than three percent inflation adjusted over a number of years, the trustees of the plan could distribute a surplus to GRA participants.  A balancing fund would be maintained to ride out periods of low investment returns.

Account balances would be converted to inflation-adjusted annuities upon retirement. The plan would also provide for a partial lump sum of 10 percent of the account balance or $10,000, whichever is higher.  A full-time worker who contributes into the plan for 40 years and retires at age 65 can be expected to receive income equal to roughly 25 percent of pre-retirement income.  Combined with Social Security this would provide 70 percent of the worker’s pre-retirement income. Participants could begin collecting benefits at the same time as Social Security. The plan would also provide a death benefit of one-half the account balance for participants who die before retiring.  Those who die after retirement could bequeath to their heirs half their final account balance less the total of benefits received.

The Guaranteed Retirement Account proposal was developed by Teresa Ghilarducci for the Economic Policy Institute.