Current retirement savings policy is actually exacerbating inequalities. Workers can shelter income if they save it for retirement in an IRA or 401(k) account — which is a terrific if you are well-off and have a high marginal tax rate, but of almost no value if you are a low earner with a low tax rate.
We have an alternative, and it is based on what we, as economists, consider one of the best-designed savings programs in U.S. history. That is the Thrift Savings Plan, or TSP, available to federal employees and members of the military. The government should offer such a program to all disadvantaged workers.
The TSP design draws from important findings in behavioral economics to help workers create retirement wealth. Most federal employees are eligible to participate and are automatically enrolled in TSP. Tax-deferred contributions are withheld from their paycheck and the government matches that contribution up to 5 percent of their annual salary. By default, those contributions go into a very low-expense mutual fund appropriate for the age of the employee.
