Clinton vs. Obama on Retirement Savings and Approaches to Economics

David Leonhardt's Economic Scene column in the NY Times today contrasts Clinton's and Obama's approaches to thinking about economics and public policy. He writes the following:

The easiest way to describe Senator Clinton’s philosophy is to say that she believes in the promise of narrowly tailored government policies, like focused tax cuts. She has more faith that government can do what it sets out to do, which is a traditionally liberal view....

Senator Obama’s ideas, on the other hand, draw heavily on behavioral economics, a left-leaning academic movement that has challenged traditional neoclassical economics over the last few decades. Behavioral economists consider an abiding faith in rationality to be wishful thinking. To Mr. Obama, a simpler program — one less likely to confuse people — is often a smarter program.

It's hard to tell how much this represents a genuine difference in thinking between the candidates.

One example Leonhardt gives is their approaches to increasing retirement savings. There are basically two types of policies that have been advocated by progressive economists over the last few years. One is government matches to savings, either provided through a tax credit or through a government deposit in individual retirement savings accounts.

The other is automatic enrollment of employees in 401(k) and/or IRA savings programs. The motivation to make enrollment automatic is that many people don't sign up when it requires a positive action to do so. Research has shown that making enrollment automatic--with a voluntary option to opt out--would drastically increase enrollment and retirement savings.

These policies are complementary, and some version of each already exists. Specifically, since 2001 there have been limited government savings matches through the "Savers' Credit" for low-income workers. And in 2006, the Congress passed a law making it easy for employers to make enrollment in a 401(k) the default for its workers. Here is an issue brief which explains these issues in detail.

The main options for further progress are 1) expanding the savings match program to middle-class households, and 2) creating "automatic IRAs" to reach workers whose employers don't offer 401(k) programs. These are both good ideas. The automatic IRA is especially attractive because it would come at very little cost, while preserving individual freedom of choice (by allowing people to opt-out).

In Leonhardt's account, Clinton is advocating the first program, and Obama is proposing the second. In fact, however, both candidates are proposing similar versions of both policies.

Here's are the key bullets on retirement security from Obama's website:

• Create Automatic Workplace Pensions: Obama's retirement security plan will automatically enroll workers in a workplace pension plan. Under his plan, employers who do not currently offer a retirement plan, will be required to enroll their employees in a direct-deposit IRA account that is compatible to existing direct-deposit payroll systems. Employees may opt-out if they choose. Experts estimate that this program will increase the savings participation rate for low and middle-income workers from its current 15 percent level to around 80 percent.

• Expand Retirement Savings Incentives for Working Families: Obama will ensure savings incentives are fair to all workers by creating a generous savings match for low and middle-income Americans. His plan will match 50 percent of the first $1,000 of savings for families that earn less than $75,000. The savings match will be automatically deposited into designated personal accounts. Over 80 percent of these savings incentives will go to new savers.

Clinton has this page which describes her version of the matched savings program. She provides more detail, but the essence of the program is the same.

Although she gives it very little emphasis, Clinton is also proposing an automatic IRA scheme. Her page says that she will "encourage all employers to provide their employees with the option to directly deposit a portion of their salaries" into the new accounts and "automatically deposit savings unless their workers opt-out."

Is there any difference at all between the candidates on retirement security? Clinton does propose a higher income cutoff to the match ($100K per couple, rather than $75K). This would mean that more families would receive the match, but also that it would be substantially more expensive. Her website estimates that the cost would be $20-$25 billion per year.

Clinton is also proposing to "encourage" employers to make enrollment in the new IRAs automatic, while Obama explicitly says that he would require employers to do so. This is not the kind of thing that would win or lose an election, but requiring employers to participate is a better idea. Without a requirement, many employers would not bother to sign-up--due to the same behavioral inertia that causes many workers to not enroll in the first place.

Despite Leonhardt's attempts to draw distinctions between the two candidates in terms of economic policy philosophy, the differences between the two candidates on the issue he highlights--retirement security--are fairly small. This is not surprising, since no doubt both plans were written in close consulation with Mark Iwry and Bill Gale, the two main retirement security policy gurus. (Peter Orszag is in this group, too, but now that he's director of the Congressional Budget Office, I'm sure he's decided not to advise any political campaigns.) My guess is that this article is the product of efforts by Austan Goolsbee, Obama's economics advisor, to inflate the small differences between the two candidates.

One final note: the automatic IRA proposal, more loudly championed by Obama than Clinton, is a political no-brainer and is supported by both progressive economists and the right-wing Heritage Foundation. This is because it's smart, nearly cost-free policy. As such, it does fit better with Obama's "bring us together" rhetoric and gives lie to the claim that the only way forward on every issue is hard-core political warfare. Making IRAs "automatic," i.e. the default option, for workers without 401(k)s, would make millions of Americans better-prepared for retirement with a policy that Democrats and Republicans can readily agree.