Saving for Retirement When You Have Nothing to Save

The New York Times lead editorial this morning highlights a new study from the Retirement Security Project, whose luminaries include former Treasury Secretary Robert Rubin. Researchers collaborated with H&R Block in a controlled experiment to see how much of a tax refund a typical H&R Block client would put in an individual retirement account if given matching funds.

The results were disheartening. Only 17 percent of the group given the highest amount -- a 50 percent match -- put money in IRAs with their refunds and matching funds. That's better than the three percent in the "no match" group and 10 percent in the "20 percent match" group. But the bottom line is that more than four out of every five low- and moderate-income persons will not save for retirement, even when given a fairly generous match from either their employer or the government.

That just a small fraction participated in the program isn't surprising. Most people in the bottom half of the income distribution live from paycheck to paycheck. Most carry large credit card balances. Most of the medically uninsured fall into this group. And as Elizabeth Warren of Harvard University has pointed out, medical emergencies among the uninsured are a primary cause of the rising tide of bankruptcy in the U.S.

So when tax time rolls around and these steadily employed get an extra paycheck, they don't have the luxury of saving for retirement. They pay those bills that are mounting at an 18 percent annual rate on their credit cards. Or they pay off that hospital bill. From a financial planning standpoint, it's the absolutely right thing to do.

Unfortunately, neither the the Times editorial nor the authors of the original study pointed out these negative findings. They preferred to look on the bright side -- that some low- and moderate-income people will save in private retirement accounts if given matching grants.

The point is well taken. The government has a responsibility to target some of its generous incentives for retirement savings to our poorer citizens. Right now, the value of the tax breaks for IRA contributions is lower for the poor because they're in lower tax brackets. Moreover, the cost of such a program -- even with universal participation -- would be just a fraction of what President Bush handed out in tax cuts for the wealthy.

For over 40 percent of Americans, though, the only retirement program they have -- or are likely to have -- is Social Security. Encouraging these folks to save in retirement accounts outside the government program (liberal opponents of Social Security privatization call them "add-on accounts") is a great idea. But the lesson of this latest study is that unless the add-on accounts are mandatory with a very generous match, most low- and moderate-income folks will not sign on. They just have too many other demands on their money.