The plan to save early retirement

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(Money Magazine) -- Conventional wisdom says that since Americans are living longer, we should work longer too - and that 401(k)s are the best tool for funding whatever retirement we can hope to afford.

But Teresa Ghilarducci isn't one for conventional wisdom. In her upcoming book, "When I'm Sixty-Four: The Plot Against Pensions and the Plan to Save Them," the New School University economist argues that a rich nation ought to be able to ensure a secure old age. And she has a radical proposal for making that happen.

One idea for fixing Social Security is to raise the retirement age, since life spans have increased. You don't agree.

No. Just because we are living longer doesn't mean we're living healthier. There's no definitive evidence on that. We may be raising the retirement age presuming people can keep or find suitable jobs when in fact that won't be true. We'll then have a nation of elderly people trying to get jobs teenagers once had. And we will be bowing our heads in shame when an older person shuffles off to make our cappuccino.

But given the strain boomers will put on the system, is there any alternative?

The idea that demography is destiny is dead wrong. Other nations have afforded retirement periods far longer than we're projecting.

Your book argues for a new retirement system that gets rid of the 401(k) tax break. Can you explain?

The tax breaks for 401(k)s and IRAs are worth $50 billion a year. What are we getting for that? People aren't saving any more because of them; those who use 401(k)s and IRAs are moving money they'd already be saving from taxed to nontaxable accounts. The 401(k) doesn't even make top-paid people save consistently. The only answer, and this is after 25 years of looking at it, is to make people save: a mandatory, universal savings plan on top of Social Security.

But the 401(k) is kind of a sacred cow.

Whatever contributions you've made to your 401(k) still won't be taxed, but most people will have to contribute 5% of salary to a public "guaranteed retirement account." Only that amount will be pretax, and the government will contribute $600 a year. For those in top brackets, income tax will go up - but so will their retirement security because even if you're tempted to stop saving, the government is saying, "You can't."

Does this have a political chance?

I think an Obama or a Clinton administration will look at this seriously. But they'd have to negotiate with the money-management industry. A fallback plan could still allow pretax 401(k) contributions of up to $5,000 a year.

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