Remember Studebakers? In 1963, their troubled automaker shut down its U.S. operations and more than 4,000 workers lost some or all of their promised pensions. Thousands of workers elsewhere found themselves in similar straits when their firms walked away from underfunded pensions. President Kennedy created a blue-chip commission to figure out how to prop up the pension system. And a decade later, President Ford signed into law the Employee Retirement Income Security Act, federally insuring private pension plans and regulating pensions and most employee benefits.
Time for a Retirement Crisis Commission?
That was the last time Congress negotiated a broad-based overhaul of the private sector’s retirement rules. Some policymakers think it’s again time for a blue-ribbon retirement panel — this time, looking at how to boost retirement security in America. Call it the Retirement Crisis Commission.
Senators Todd Young (R-Ind.) and Cory Booker (D-N.J.) are the sponsors of the bipartisan legislation. They’re calling for the formation of a federal retirement commission with a mandate to design ways to improve private sector retirement security. The conservative and progressive senators joined forces to draw up the initiative following the recommendation in a sobering 2017 Government Accountability Office report on the retirement system.
“My hope is that the commission would deliver to Congress some ideas that are bold and ambitious,” says Young. “It has been 40 years since Congress has looked at private retirement security in a comprehensive manner. In the intervening decades the economy has been transformed.”
I hope his peers listen and the blue-ribbon panel gets greenlit.
America’s Retirement System: Complex and Byzantine
A federal commission would at least open up the prospect that Congress might help modernize a system that has evolved (devolved, really) into an overly complex, byzantine and woefully inadequate safety net for America’s retirees.
“We now have a huge, huge mess,” says Eugene Steuerle, senior fellow at the Urban Institute, a Washington, D.C. think tank. “The big issue for me is the retirement system doesn’t do what it’s supposed to do — protect people. In that sense, it’s a failure.”
The biggest failing? About 40 percent of full-time private-sector employees lack access to an employer-sponsored retirement savings plan. They typically work at small-to medium-sized businesses. The main reason small business owners say they don’t offer a retirement savings option is the expense of setting up and managing the plans, according to a 2017 Pew survey.
Contingent workers — think freelancers, independent contractors and gig economy workers — also can’t participate in an employer-sponsored retirement plan because they’re not employees. The same holds for most part-time workers.
Even people who can sign up a 401(k) retirement plan at work often find it hard to save and manage their portfolio. That helps explain the dismal figures you’ve no doubt seen on how little so many workers have in retirement savings.
From Employers’ Risk to Yours
Over the past four decades, companies have moved away from traditional pensions where employers bear the investment risk and commit to a fixed payout of money, typically based on a salary and years-of-service formula. With those plans, employees get a steady pension income — essentially a monthly paycheck — during their retirement years.
Some members of the leading edge of the boomer generation have this kind of pension in retirement or will (although the size of their benefits may have been frozen some years back). But most younger boomers, Gen Xers and millennials only know about pensions from history books or tales from earlier generations in their families.
These days, of course, companies that offer retirement plans have shifted to defined contribution retirement savings plans such as 401(k)s. Here, employees absorb all the responsibility and risk of saving for retirement. They decide how much to invest (within regulatory limits) and where to invest (within the menu of choices in the plan).
The Crumbling Pillars of Retirement
Trouble is, as behavioral economists have documented, most of us are bad at saving and investing regularly and for the long haul. And we’re getting worse. Personal savings rates are about half what they were the 1970s and 1980s.
Not only do half of private-sector workers fail to participate in retirement savings plans (adding together those without the option and those who don’t join). Worse, about a quarter of plan participants borrow or withdraw from their retirement savings; many don’t put the money back.
And did I mention that the Social Security trust fund is expected to be unable to fully pay promised benefits 16 years from now, in 2034?
Taken altogether, the three pillars of America’s retirement savings system are crumbling — employer pensions or retirement savings; personal savings and Social Security.
How the Blue-Ribbon Panel Would Work
That brings me back to the blue-ribbon commission. It would include the U.S. Secretaries of Labor, Treasury and Commerce; two presidential appointments; six appointees from the U.S. Senate and six from the U.S. House of Representatives. They would focus on the private sector (Social Security might be a panel for another day).
Young told me he wants the experts to think big. They should consider retirement issues facing the mobile workforce, gig economy workers and part-time employees, he says. Young wants the panel to explore what kinds of nudges, incentives and other insights from behavioral economists might encourage Americans to save more for retirement.
The commission would explore policies to emulate from other countries, such as the mandatory retirement savings systems of Australia and several Scandinavian nations. “I’ve read about some of the reforms to government programs in the Nordic countries which are more innovative than people are aware of,” Young says.
Many Worthy Ideas to Consider
There’s no shortage of good ideas for the panel to review.
For instance, the “auto-IRA proposal” by J. Mark Iwry of the Brookings Institution and David John of AARP would make savings more automatic and accessible for the millions of workers not covered by employer-sponsored retirement plans. Economist Teresa Ghilarducci, of the New School for Social Research, and Hamilton James, executive vice chairman of the money-management giant Blackstone, favor Guaranteed Retirement Accounts. With those, any employer not offering a 401(k) would need to participate in, and contribute to, a government-sponsored retirement savings plan.
And one idea long floated by retirement security experts is attaching an Individual Retirement Account or 401(k) to each Social Security account.
Even if Congress approves a retirement commission, the risk is that its report will get shelved. That’s what happened to the retirement system study launched in 1979 by President Carter. Its recommendations — including a mandatory universal private pension — were released in 1981.
We can’t wait any longer.
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