Is a retirement savings crisis on the horizon?
Time to read: 3 min
At the House Ways and Means Committee hearing on Feb. 6, 2019, witnesses promoted various solutions to address the projected retirement savings shortfall of American workers.
Committee Chairman Richard Neal, D-MA, opened the hearing by highlighting current trends that he said are indicative of a retirement income crisis in America (e.g., overly modest Social Security benefits, disappearing traditional pension plans and workers’ struggles to save for retirement). He noted that employer-sponsored retirement plans are the key to preparing for retirement, despite significant gaps in coverage for millions of workers, especially for employees of small businesses. To bolster his argument, he cited statistics showing that for workers earning between $30,000 and $50,000 per year, more than 70% would participate if offered a retirement plan at work, but only 5% would save on their own through an individual retirement account (IRA).
Neal also pointed to the open multiple employer plan (MEP) provisions of the Retirement Enhancement and Savings Act (RESA), reintroduced in Congress on Feb. 6, as a good starting point for bipartisan discussion, as well as his Automatic Retirement Plan Act, which would require all but the smallest employers to maintain a 401(k) plan for their employees.
Key recommendations around Social Security and MEPs
Diane Oakley, Executive Director of the National Institute on Retirement Security, observed that we should celebrate the progress we have made in reducing poverty among older Americans due in part to Social Security. However, she believes that the shift from traditional defined benefit (DB) pension plans to defined contribution (DC) plans has made it more difficult for Americans to save for retirement, noting that the shift has “… increased the risks and responsibilities for individuals in planning and managing their retirement.” She urged Congress to take “bold strokes” to improve America’s retirement preparedness, suggesting that one such action would be to “… promote universal access to a retirement savings vehicle through employer payroll so all Americans could take that first important step to pay themselves first with a retirement contribution.” She also testified that Congress should consider expanding and transforming the current tax credit for low- and moderate-income taxpayers who save for retirement.
Nancy Altman, President of Social Security Works, discussed the key benefits of Social Security, while stressing that the average Social Security benefit is still too modest. She testified that Social Security is especially important for women, people of color and others who are disadvantaged in the workplace. Her main suggestion for the committee was to increase the benefits paid by Social Security, contending that this would be one of the most efficient and effective ways to address the US retirement savings shortfall.
Cynthia McDaniel, a multiemployer pension plan advocate, focused on the dire funding challenges faced by many (but not all) union-sponsored multiemployer pension plans. She expressed her support for the Rehabilitation for Multiemployer Pensions Act, recently reintroduced in Congress by Chairman Neal.
Plugging the gap in private retirement savings
Roger Crandall, Chairman, President and CEO of MassMutual, suggested that while existing tax incentives for private retirement savings have been a tremendous success in encouraging Americans to save for retirement, there are still significant gaps in the nation’s private retirement savings system. Barriers to increased retirement security include lack of access to workplace retirement plans, low savings rates and longer life expectancies. He observed that lower participation and savings rates are disproportionately experienced by women, minorities, low-income employees and employees of small businesses. Crandall believes that more must be done to give more American workers the opportunity to achieve a financially secure retirement. This includes broadening retirement plan coverage, especially among small employers; increasing savings in existing plans and accounts (for example through enhanced automatic enrollment); and facilitating guaranteed income for life, which protects retirees from outliving their retirement savings.
Small and large business owners weigh in
Luke Huffstutter, a small business owner, focused on the savings opportunities his employees have enjoyed as a result of being able to participate in the state-run OregonSaves DC plan program. He urged the committee to consider making it easier for other states to follow in Oregon’s steps.
Robin Diamonte, Corporate Vice President for Pension Investments at United Technologies Corporation (UTC), provided insights from the perspective of a large employer offering retirement benefits to its employees. She discussed the steps that UTC has taken to promote retirement security for its employees, including a “Lifetime Income Strategy” program that utilizes automatic enrollment, various employer contributions, target date funds and lifetime income features. She reiterated that plan sponsors often are hesitant to incorporate innovative approaches in DC plans over the legal risk. Consequently, she urged Congress to “… create a pathway toward plan sponsor and fiduciary innovation, using clear and specific guidance, and reducing legal impediments.”
Some signs point to progress
Andrew Biggs, Resident Scholar at the American Enterprise Institute, cited statistics indicating that America is not experiencing a retirement savings crisis, including an increase in retirement savings, growing retirement plan participation, lower poverty rates for the elderly and lower dependency on Social Security. He expressed support for automatic enrollment, target date funds and open MEPs. He also urged Congress to fix the underfunding of government retirement plans, including Social Security and governmental DB plans.
The Senate Special Committee on Aging also held a similar hearing on Feb. 6 about financial security in retirement and best practices to promote savings.
We’ll keep you posted on future developments with respect to retirement security.
SPARK GRC, “Summary of House and Senate retirement hearings,” Chris Gaston, Feb. 6, 2019
PlanSponsor, “Experts push Ways and Means committee for retirement reforms,” John Manganaro, Feb. 7, 2019
NAPA Net, “RESA, open MEPs at forefront of House retirement security hearing,” Ted Godbout, Feb. 7, 2019
Blog header image: Aaron Burden/Unsplash.com
Senior Analyst Retirement Research, Invesco Consulting
Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.
Prior to joining Invesco in 2008, Mr. Vogler spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.
Mr. Vogler earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He earned a BA degree in history from Rutgers, The State University of New Jersey.