Banking on universal savings accounts?

'USA savings' should enhance - not replace - current forms ofretirement savings

During his State of the Union address in January, President Clinton announced several initiatives to help Americans achieve financial security in retirement. One of those is his plan for the establishment of universal savings accounts (USAs) to close the gap in many Americans' retirement savings. This program would use federal matching contributions to help workers save part of their salaries for their post-employment years.

While the goals of these USAs are worthy, the president's plan for achieving those goals has the potential to be self-defeating. If USAs are established as an independent federal program rather than a supplement to existing private pension plans, they could encourage waste and complexity, and discourage American businesses - particularly small businesses - from offering retirement benefits to their employees.

Over the past several decades, many employers have helped their employees build a stronger foundation for retirement. As a result, approximately 104 million Americans participate in employer-sponsored retirement plans. Another 40 million have individual retirement accounts (IRAs). Overall, nearly $9 trillion has been saved in the private retirement market, an amount that accounts for more than 25 percent of our nation's wealth.

This is not to say that the employer-based retirement system is without flaws. But it makes little sense to reinvent the wheel. If the president's USAs are designed to work through the existing infrastructure of private pension plans, they have the potential to make a significant contribution to Americans' retirement security. A massive government-administered program that starts from scratch could well have the opposite effect.

The reasons for this discrepancy are twofold. The first is simplicity. Employees are familiar with the retirement options offered by their employers and, in many cases, already have money invested in these private plans. USAs could be added to the mix with a relative minimum of difficulty. For example, employees with 401(k) plans could use federal matching contributions to increase the earnings already in their accounts. Those individuals who work for businesses without pension coverage could link to the program through IRAs set up through payroll deduction.

In contrast, a purely federal system would require the creation of more than 100 million individual retirement accounts and the bureaucracy needed to support them, an effort that will generate significant costs for taxpayers and consume valuable time. Even worse, federally administered retirement accounts will add an entirely new level of political concern - the federal government's intrusion in the stocks and bonds marketplace - to an already inefficient design.

The second, and possibly more important reason is the effect on the business community.

Currently, the business sector that is least likely to offer pension coverage to employees is also the most important to our economic prosperity - small businesses. In my home state of Florida, more than 1 million jobs have been created since 1992, 72 percent of them in companies with fewer than 20 employees.

But while small businesses form the backbone of our work force, they are the glaring exception in the private retirement market. While 78 percent of workers in firms of more than 1,000 employees have retirement benefits, only 13 percent of those who work in small businesses enjoy the same.

The news is not all bad. Because companies that offer retirement benefits enjoy a competitive advantage in employee recruitment and realize increased productivity through improved morale, nearly half of all small businesses say that they are "likely" or "somewhat likely" to establish retirement plans in the next two years. If small business employers and their employees knew that the creation of a private pension plan would open the door to federal matching contributions, the impetus to do so should be substantially increased.

Unfortunately, direct competition from government-run USAs could halt progress in its tracks. Businesses might use the new federally administered savings accounts as justification for removing themselves from the retirement planning process altogether. The perverse end result could be less total savings, not more.

Mr. Clinton is to be commended for making retirement security a main goal of his final two years in office. But success in achieving that goal does not mean starting anew. If USAs complement the efforts being made in private businesses across the United States, they will help Americans enjoy their retirement with an increased measure of financial security.

*Bob Graham is a Democratic senator from Florida. He is on the Senate Finance Committee.