An independent commission to discuss retirement security? Yes, please!

An independent commission to discuss retirement security? Yes, please! October 21, 2017; By White House photo by Kimberlee Hewitt [Public domain], via Wikimedia Commons

Hooray!  The GAO read the Jane Plan and wants to implement it.  Or maybe they’ve read other things I’ve written, under my real name, my quixotic attempts to put my ideas “out there” in a Society of Actuaries call for essays, for instance.

OK, fine, my name doesn’t appear anywhere in the footnotes for their publication, “The Nation’s Retirement System; A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security,” which I first came across via an article in, via my twitter feed.  But they still recognize that we need to look at the system more comprehensively than just tinkering with autoenrollment, for instance.

The U.S. retirement system is in need of a major overhaul, according to a new report from the Government Accountability Office, which is calling on Congress to establish an independent commission that will not just analyze the situation but also recommend changes to promote retirement security. “A comprehensive re-evaluation is needed,” according to the report.

With that in mind, the GAO suggests that the commission include representatives from government agencies, employers, the financial services industry, unions, participant advocates and researchers.

So, to start with, yes, GAO, where can I send my resume?  I want in on this.  I’ve got all your answers.  I just have to convince everyone else.

But in the meantime, let’s take a look at this report, shall we?  After all, I am stuck supervising my son as he writes his college application essay, which is a really stinky way to spend what’s possibly the last really nice day of autumn, but what can you do, eh?   Anyway, it’s a doozy, over 100 pages, so this could take a while — and if you doze off, you’re excused, as I’m primarily writing this up for my own purposes anyway.

To begin with, this is not a report on “fixing Social Security.”  This is about the entire system of retirement planning, and retirement income, from employer benefits to private savings to government incentives, as well as, of course, direct government retirement provision.

The report starts with an overview:  the rise of 401(k) plans adds new challenges for workers:  the ability to access retirement plans, the ability to save sufficient amounts, and the risk of outliving savings.  The report itself is then divided into 4 sections:  an overview of the changes in the overall retirement system landscape, the challenges that individuals face, the challenges that the system as a whole faces, and the case for a comprehensive rather than piecemeal reform.

Section 1:  Landscape of U.S. Retirement System Has Shifted

The report provides a brief overview of the development of the existing retirement system:  Social Security, the development of private pensions as a means of enhancing compensation during the World War II wage freeze, the ERISA funding legislation of 1974.   A couple charts show the rise of 401(k) plans, and the explosion in DC (Defined Contribution) and IRA asset growth, especial since about 2000, and the report cites multiple reasons for the growth in DC plans, both from the employer’s and the employee’s perspective (cost/contribution flexibility vs. portability, respectively).

The report then identifies various economic trends complicating the retirement picture.  Average household income has stayed relatively unchanged for all but the highest income quintile, while average debt levels have increased significantly, and out-of-pocket healthcare spending is projected to remain above the CPI for the indefinite future.  Life expectancy continues to increase.  Also, fewer individuals are married (unmarrieds — whether never-married, divorced, or widowed — increased from 39% to 48% of the population from 1980 to 2016.  For low-income individuals, 62% are unmarried.  These trends matter because unmarried individuals are missing the economic benefits of being able to pool resources, and miss out on survivor benefits.

Section 2:  Individuals Face Three Key Challenges in Planning and Managing Their Retirement

This section starts with a pie chart, which breaks down aggregate income sources for 65+ households:  33% from Social Security, 4% from welfare programs, 34% from earnings, 9% from asset income (income from selling a home, getting a reverse mortgage, or interest, dividend or other income from non-retirement savings), and 20% from pension and retirement plans.  (Note that in an article that I never quite manage to write about, and related research elsewhere, AEI scholar Andrew Biggs writes that government analyses of retirees’ income understates DC income by excluding spending down of deferred-income retirement accounts; whether this is an issue in this particular data I couldn’t say.)

So here are the challenges:

First, accessing retirement plans:  smaller employers are much less likely to offer retirement plans than larger ones.  The smallest firms, with 50 or fewer workes, were 9 times less likely to have access to a plan.  The administrative cost of sponsoring a plan is a significant deterrent.  In addition, certain industries were much less likely than others to offer DC plans; the leisure and hospitality industry receives a particular mentionbecause only 32% of workers had access to a plan.  And each income quartile, from upper to lower, is successively less likely to have access to a plan.

While any such worker has the ability to access retirement savings via an IRA, they are not nearly as likely to do so, as workers are to participate in employer-sponsored plans.

Second, individuals face challenges accumulating sufficient retirement savings.

With respect to DC plans, they must decide how much to contribute, and, while autoenrollment policies have substantially increased participation, there is no consensus even among experts, let alone individuals, on how much one needs to save.  Even after an individual has made a decision about a percent-of-pay contribution level, they must still decide how to invest the funds, though many employers now provide managed fund services and target date funds.  A further difficulty is leakage, that is, the loss of retirement savings when a worker moves jobs and decides the account isn’t large enough to be worth it to roll over, even despite the tax penalties.  Even for employees who want to do the right thing by rolling over their account, they’re better off moving it into their new employer’s 401(k) account rather than an IRA, due to better fee levels, but it can often be too difficult to accomplish this.  Employees can also miss out on employer contributions if they’re not vested, or in cases where an employer pays out the year’s contribution only at the last day of the year, if an employee is still employed.  Finally, employees with a lot of job moves can end up losing track of accounts and failing to claim them at retirement.

While DB accruals are automatic, participants are still at risk of low accruals if they move jobs; even if they are vested, benefits are generally frozen based on the salary at the time of termination, rather than any increase up to retirement age.

Low-income individuals are particularly likely to not save for retirement; 25% of lowest-quartile households have DC savings, compared to 81% of top-quartile households.  Women and minority workers are also less likely to save, or likely to save less.

The federal government has actively tried to encourage more savings, for instance through the Saver’s Credit, improved reporting requirements, and financial literacy initiatives.  Legislation also encouraged auto-enrollment programs in employer plans.

Third, retirees will face further challenges.  Many plan on working longer to make up for lack of retirement savings; but declining health may prevent this.  Even those with healthy DC balances will struggle with how to turn their balance into income meant to last for their lifetime — they don’t understand what their life expectancy is likely to be, or how to plan for the risk of living longer than expected.  What’s more, although they are certainly able to purchase annuities on their own, they generally find them too expensive and face a large psychological hurdle.

DB plan participants are generally at much less risk, unless their employer offers, and they accept, a lump-sum payout, in which case they’re no better off than the DC-ites.   (This is a huge development, as employers are systematically offering employees this option.  To be sure, only pre-retirement participants who are in a “deferred vested” status are eligible, but this is still a substantial number of participants.)  In addition, if a company goes out of business and the PBGC takes over the plan, there are limits on how much of the benefit will be covered; this is a sizable amount ($64K for age-65 retirees) but not always the full benefit.

Section 3:  U.S. Retirement System Is Threatened by Fiscal Risks and Benefit Adequacy Concerns

The most visible risk is that of the depletion of various trust funds:  2025, for the Multiemployer version of the PGBC; 2028, for the SSDI trust fund; 2029 for the Medicare Part A fund; 2035 for the Social Security Old Age fund.  When the Social Security trust fund is depleted, only 75% of current benefits will be payable.

The employer piece has risks as well — the PBGC has a substantial deficit, largely due to Multiemployer plans.  For single-employer plans, premiums have been increasing significantly, but the decline in the overall number of participants means a lower premium base.  (And, side note, one feeds off the other:  employers are now finding it cheaper to purchase annuities for their retirees than to pay out benefits themselves, plus the administrative cost and PBGC premium.)

And, of course, in the public sector, state and local government workers continue to receive benefits in the form of DB plans, which have their own funding issues.

Finally, the third pillar of the retirement system, which they define not as individual savings in general, but as savings outside of retirement plans, has also weakened, as the individual savings rate has declined.  And, naturally, the less money people have in retirement, the more dependent they’ll be on safety net programs, whether it’s Medicaid, or Meals on Wheels, SSI, or other programs.

Section 4:  The Need to Re-evaluate the Nation’s Approach to Financing Retirement

In the past 40 years (that is, since, more-or-less, the passage of ERISA), retirement issues have been dealt with in a very piecemeal fashion, with legislation on funding requirements, DC plans, and so forth.  There have also been three commissions:  the 1979 President’s Commission on Pension Policy, which made a series of recommendations which were never implemented; the 1981 National Commission on Social Security  Reform; and the 2001 President’s Commission to Strengthen Social Securit, which likewise never produced any changes.  In the meantime, there are at least 10 agencies involved with the elderly/retirement in some manner.

The GAO convened a panel of experts in 2016, and those panelists had the general opinion that a more comprehensive review was warranted.  They noted that different groups had different needs — e.g, the poor need a shoring up of Social Security; the middle class, better retirement savings vehicles/access.  Some panelists mentioned the NEST nationwide program in the UK.  A panelist proposed a multi-employer-like DC plan, with government sponsorship and a lifetime income option.

The report also brings in international comparisons – big points for doing so!  They looked at the Melbourne Mercer Global Pension Index, which benchmarks countries’ retirement systems, as well as similar studies by other expert groups.  The report spends quite a bit of time discussing the rankings on these studies, though not really any time discussing elements of other systems as potential inspirations for US reform (except the NEST plan, above).


The report concludes, before diving into appendices, that

Congress should consider establishing an independent commission to comprehensively examine the U.S. retirement system and make recommendations to clarify key policy goals for the system and improve how the nation can promote more stable retirement security.  We suggest that such a commission include representatives from government agencies, employers, the financial services industry, unions, participant advocates, and researchers, among others, to help inform policymakers on changes needed to improve the current U.S. retirement system.

About which I can only say:

Bloggers.  Your list is missing bloggers, bloggers who read these reports on Saturdays while simultaneously trying to walk high schoolers through college application essays without going so far as to cross the line into just writing the darn thing themselves.


Image:; By White House photo by Kimberlee Hewitt [Public domain], via Wikimedia Commons  Look, at some point I tried to find a picture of generic retirees, but I came up empty.

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