Monday, November 8, 2010

What Are Guaranteed Retirement Accounts?

Ida May Fuller, the first recipientImage via Wikipedia
In my last post I reported how there is talk in congress to supplement Social Security with a new type of account called a Guaranteed Retirement Account. The plan itself has been finalized and has been talked about for several years. At the present time boosters of the plan are trying to sell it around Washington.
This account is the idea of Teresa Ghilarducci.
There are many pros and cons to this plan. It will have a hard time being accepted because of the current dissatisfaction with government. I will try to give a concise explanation of its workings.
How Guaranteed Retirement Accounts work
Guaranteed Retirement Accounts are like universal 401(k) plans except that the government, as befits a large and enduring institution, will invest and manage the pooled savings.
Participation in the program is mandatory except for workers participating in equivalent or better employer defined-benefit plans where contributions are at least 5% of earnings and benefits take the form of life annuities.
Contributions equal to 5% of earnings are deducted along with payroll taxes and credited to individual accounts administered by the Social Security Administration. The cost of contributions is split equally between employer and employee. Mandatory contributions are deducted only on earnings up to the Social Security earnings cap,2 and workers and employers have the option of making additional contributions with post-tax dollars. The contributions of husbands and wives are combined and divided equally between their individual accounts.
Refundable tax credit. 
Employee contributions are offset through a $600 refundable tax credit, which takes the place of tax breaks for 401(k)s and similar individual accounts and is indexed to wage inflation. Eligibility for the tax credit is extended to part-time workers, caregivers of children under age six, and those collecting unemployment benefits. If an individual’s annual contributions amount to less than $600, some or all of the tax credit is deposited directly into the account in order to ensure a minimum annual deposit of $600 for all participants.
Fund management. 
The accounts are administered by the Social Security Administration and funds are managed by the Thrift Savings Plan or similar body. Though funds are pooled, workers are able to track the dollar value of their accumulations, as with 401(k)s and other individual accounts.
Investment earnings. 
The pooled funds are conservatively invested in financial markets. However, participants earn a fixed 3% rate of return adjusted for inflation, guaranteed by the federal government. If the trustees determine that actual investment returns have been consistently higher than 3% over a number of years, the surplus will be distributed to participants, though a balancing fund will be maintained to ride out periods of low returns.
Retirement age. 
Participants begin collecting retirement benefits at the same time as Social Security, and therefore no earlier than the Social Security Early Retirement Age. Funds cannot be accessed before retirement for any reason other than death or disability.
Retirement benefits. 
Account balances are converted to inflation-indexed annuities upon retirement to ensure that workers do not outlive their savings. However, individuals can opt to take a partial lump sum equal to 10% of their account balance or $10,000 (whichever is higher), or to opt for survivor benefits in exchange for a lower monthly check. A full-time worker who works 40 years and retires at age 65 can expect a benefit equal to roughly 25% of pre-retirement income, adjusted for inflation, assuming a 3% real rate of return. Since Social Security provides the average such worker with an inflation-adjusted benefit equal to roughly 45% of pre-retirement income, the total replacement rate for this prototypical worker will be approximately 70%.
As you an see there are many problems to overcome:
  • Mandatory participation.
  • Additional payroll deduction in addition to Social Security.
  • Administration by Federal government.
  • Fixed rate of return.
  • Balance minus 50% returned as death benefit.
This plan may have a chance if all the mandatory and restrictive dictates are removed. The plan should not be run by the government. It should be in the public sector. If this plan and a adaption of the Chiliaen Retirement Plan could be implemented, we may have something.


  1. The short answer is--- Guaranteed retirement accounts are another step down the road to serfdom. Reject this nonsense outright and save for your retirement yourself. The government needs more money any way it can get it because it can't stop spending. Do your kids and grandkids a favor and kill this idea.

  2. We already have so many ways to save for retirement. IRA's, Roth's, SEP's, 401(k)'s. Leave us alone and stay out of pockets, we'll provide for ourselves.

  3. Indeed, there are so many options out there already. I know I've heard bad things about the state of Social Security, but I don't know if this kind of path is one to pursue. For someone who is interested in other options that already exist, has some good information.


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