February 2011, Dean Baker and David Rosnick

This paper outlines a proposal for a default savings plan that is intended to provide an important supplement to retirement income for the bottom half of the workforce, most of whom have little other than Social Security to support themselves in retirement at present. Under the proposal, workers would make a default contribution of 3.0 percent on annual wages up to $40,000. They could opt out from this contribution if they choose. The contribution would be automatically turned into an annuity at retirement although workers would have the option to make a lump sum withdrawal after paying a modest penalty.

The lowest income workers would get a modest contribution paid into the system by the government based on their earnings. This payment would be modeled along the lines of the Earned Income Tax Credit, with the payment increasing with earnings up to $8,000 and then phasing down to zero with earnings above $20,000. There would also be a match of savings that phases down to zero at $40,000.

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