By Richard Eisenberg Next Avenue Managing Editor
getty
The American pension savings system is in chaos (it is a technical economic term). “System” is actually too big a word for an ad hoc retirement savings building built over the years.
It is certain that the system works quite well for those on the payroll of an employer with a pension insurance plan and a relatively stable job. Employees in larger companies usually have 401 (k) s with automatic enrollment, automatic contribution increases, and a default target date option that provides a well-diversified portfolio for those who are unable or uninterested in managing their portfolio.
But for most people, the system is too opaque, too difficult to manage, and too often too many workers fail to provide economic security in retirement.
“I think the most important conclusion is that the American retirement system is too complex and confusing,” David John, deputy director of the Retirement Security Project at the Brookings Institution Research Center, told me in a recent interview. “It must be easier for people to work and understand.”
What the authors of ‘Wealth after work’ say
Amen to that.
John, who is also a senior strategic policy adviser at the AARP Institute for Public Policy, is one of three editors of Wealth After Work, an intriguing new Brookings book on improving the national pension savings system. They are not quite ready to blow up the existing pension savings system, but they have some smart ideas about what could make it fairer and more useful.
The other two editors are William G. Gale (former senior staff economist under President George HW Bush) and J. Mark Iwry (former Deputy Assistant Secretary of Retirement and Health Policy in the Treasury Department under President Barack Obama). It’s hard to think of three smarter experts on pension security policy.
The policy-driven book — OK, Naughty — covers a wide range of challenges, such as:
- Worrying prospects for millennial retirement savings
- How to replace women’s pension savings and what to do about it (their suggestion: start with a strong paid family leave and medical program)
- Converting the balance of a pension plan account into a stream of reliable retirement income (they say, create a default “decumulation” strategy option)
- Bringing in about half of the private sector workforce without an employer-sponsored retirement savings plan u pension system (starting with expanding state pension savings plans, advise; more on them soon)
Despite the neutral tones of veterans, bipartisan researchers, collectively, the essays drive all books crazy: Why are there allowed to be deep flaws in the American pension savings system?
An urgent need for retirement reform
Every day that continues with the existing system is an inadmissible injustice to working people who will eventually retire and should be able to predict a comfortable standard of living. Many can’t now.
The need for reform is urgent, at least in part driven by the interaction of four main factors, not counting the demographics of an aging population.
The first and most well-known factor has been the withdrawal of corporations in America since the 1980s by offering employees traditional defined-benefit retirement plans in favor of defined-contribution plans, such as 401 (k) s.
With a defined benefit pension plan, the employer bears all the investment risk and commits to a fixed payment of money for the rest of the pensioner’s life, usually based on the salary formula and years of service. In contrast, with 401 (k), employees run the risk of deciding how much to invest and where to invest (within regulatory and planning limits). And, of course, they have to find the money for that.
The problem is that the standard of living of almost retired and recently retired people, counting on their 401 (k) s, is extremely sensitive to unexpected market declines. Moreover, 401 (k) and other pension plans like it offer little guidance on how to turn accumulated assets into a steady stream of reliable retirement income.
Another disadvantage is that the United States relies on companies to decide to offer their workers a pension. Usually larger companies do it, but many small and medium companies do not.
“If an individual does not have access to a salary deduction, automatic enrollment and an automatic pension increase plan, they are unlucky,” says John.
Research by the nonprofit Research Institute for Employee Benefits shows this year after year, with large differences in pension savings between people with 401 (k) type plans and those without them.
Workers who have left the existing pension savings system
Third, a traditional employer-based retirement plan excludes contingent workers, such as independent contractors, gig workers, freelancers, security guards, and maintenance professionals. Part-time workers are also often left out.
Conditional workers and others with alternative work schedules accounted for nearly 13% of the workforce, or 20 million people in 2018. That number has almost certainly increased since then.
“No matter how well or poorly it serves the needs of traditional workers, the current retirement system does not meet the needs of contingent workers, who are likely to have less job stability than traditional workers,” write Gale, John and Sarah Holmes Berk, director of research at the National Bureau of Economic Research. the theme of “Wealth after work”.
They add, “It’s also inadequate for those moving forward-backward between contingent and traditional jobs.”
Most importantly, the current system does not exclude or disadvantage contingent workers, but also minorities and women. The cumulative impact will contribute to the increase in wealth inequality between whites and minorities – especially blacks – in recent decades.
“If this trend continues, inequality in wealth it will continue to increase, which will make it even more difficult for minorities to save adequately for their pensions, “the book’s editors write.
All in all, the current situation is deeply flawed. Still, the editors of the “Wealth After Work” clone are calling for radical reforms. Instead, they embrace evolutionary change by explaining the best policy ideas they have seen for solving certain pension savings problems.
2 suggestions worth considering
I think the two proposals are particularly noteworthy, as both would expand access to retirement savings plans.
One is that the idea of an auto-IRA (individual pension account) state pension savings program is greatly extended to more workers without employer-sponsored plans. Three states currently offer this type of plan – Oregon, California and Illinois. Many are thinking about creating their own version.
“State-sponsored retirement savings plans offer the best chance in the near future to increase the number of Americans who have access to pay-as-you-go retirement savings plans,” Gale and John write in their chapter on plans. “In the absence of a comprehensive federal program, they could provide the most significant improvement in coverage in many decades.”
OregonSaves, which started in 2017, is a good example of this idea. It’s about the Roth IRA’s automatic retirement retirement savings for Oregon private sector workers who don’t have access to workplace retirement plans.
Companies in the state of Beaver that do not have retirement plans must enroll their employees in OregonSaves. Each account is linked to an individual – noto your employer – ensuring easy portability when changing jobs. In order to reduce costs for employers, there is no matching company. The default post-tax contribution rate for employees is 5% of gross salary. Workers can be excluded if they do not want to participate (approximately one third of eligible workers log out).
The complementary approach is focused on contingent workers. The basic idea here is to create “employer-enabled” accounts where potential workers would have a retirement savings account that travels with them from job to job. Employers would be required to allow contingent workers to pay wage deductions to their accounts (and withhold state and federal taxes).
The version that seems to favor the authors would have such an account in line with the employer’s plan (if offered). In other words, if a conditional worker gets a job at a company with 401 (k), the account would be subject to 401 (k) rules. If the firm does not have a pension, the account of potential workers would be treated as an IRA with a deduction from salary.
Going through various essays, I couldn’t help but think, “Isn’t it time to just blow up the state pension savings system and start over?”
Certainly, this is believed by Martin Wolf, a respected chief commentator on economics in The Financial Times. “The old is dying. But the new is miserable,” he writes, adding that “policymakers must first dare to think bolder.” (His series of Financial Times essays focuses on the British pension system, but his analyzes and suggestions apply to the United States)
Like so much in the U.S. economy and society, retirement policies ultimately reinforce inequalities instead of fighting them.
America Vs. Other countries
Frustrated, I invited Kurt Winkelmann, a senior fellow at the Heller-Hurwitz Institute at the University of Minnesota and co-founder of investment research firm Navega Strategies. He noted that any broad-based solution must take into account that we live in the United States
“We don’t live in Canada or the Netherlands – countries with a more communist spirit,” he told me. “Any change in pension must respect that.”
I count. History is important. So do institutions and political cultures. Yet the lure of extensive, impatient reform is strong.
In another interview with Zvi Bodie, a financial economist and emeritus at Boston University, he suggested a time-tested possible solution: Put it all in something like the traditional TIAA variable annuity founded in 1918 by the Carnegie Foundation for Teachers. (TIAA means Teachers’ and Rent Insurance Association).
Fund participants are guaranteed at least 3% per annum on their money; they can earn more if the portfolio manages better.
Another similar universal retirement option favored by seemingly strange friends — New School of Social Research, Liberal Economics professor Theresa Ghilarducci (impact on aging from Next Avenue) and Kevin Hassett, president of the Council of Economic Advisers under President Donald Trump — are to put everyone on disposal in a giant federal government savings plan.
Let’s put it this way: People with retirement savings have more choice in old age and less need for government services during them. They offer cheap, broad and easy to understand retirement savings plans for everythingworkers should be the kind of job that liberals, conservatives and independent people would race for.
When (if?) You finally retire, it’s not too much to expect that your standard of living won’t plummet. If turning that insight into a pension savings system is a radical goal, let the revolution begin.
