As the 109th Congress leaves Washington for the election season, its members should be proud of the progress made in helping American workers be able to achieve retirement security.
In mid-August, President Bush signed the Pension Protection Act of 2006, which Congress passed after successfully resolving a number of very difficult issues.
This wide-ranging legislation will contribute to the retirement security of millions of Americans by helping assure the financial soundness of defined benefit plans; making permanent “catch-up” contribution provisions for those over age 50 and higher contribution limits for IRAs and 401(k) plans (both of which were enacted as temporary measures in 2001); allowing rollovers to IRAs by non-spouse beneficiaries of an employee’s interest in a qualified plan; and making qualified long term care insurance more affordable by allowing it to be combined with annuity contracts in a tax-efficient manner.
Looking ahead, what is the retirement security outlook for the approximately 71 million Americans who work for employers that do not offer employees any type of workplace retirement plan?
The bad news is this outlook is bleak when taking into account today’s all-time low savings rate, increasingly longer life expectancies, and the fact that these workers do not have the opportunity to participate in a workplace savings plan. But the good news is a number of initiatives to address the retirement security needs for these individuals are in the works.
For example, the “automatic IRA,” a bipartisan idea championed by, among others, David C. John of the Heritage Foundation and J. Mark Iwry of the Brookings Institution, would feature direct payroll deposits to a low-cost, diversified individual retirement account.
With this approach, most American employees not covered by an employer-sponsored retirement plan would be offered the opportunity to save through the mechanism of regular payroll deposits that continue automatically (an opportunity now limited mostly to 401(k)-eligible workers). The “carrot” that would be offered to employers to do this is a modest tax credit.
The focus of this important idea is, of course, greater retirement savings. However, an equally important aspect of retirement security for workers who lack a workplace retirement plan, as well as for many who do have access to such plans, is assuring that retirees do not outlive their incomes.
One group that has been working on this issue is Americans for Secure Retirement. Formed in 2003, ASR is a coalition of 38 organizations representing a broad cross section of interests including women’s groups, minority groups, rural organizations, small business groups, and life insurance companies. The coalition was formed to advocate for policies that would help Americans better manage savings so the savings will last throughout the many years spent in retirement.
A legislative focus of ASR is the Retirement Security for Life Act. The House version of this bill, H.R. 381, has garnered substantial bipartisan support, and now has 80 sponsors, including a majority of the members of the House Ways and Means Committee. This legislation is designed to encourage Americans to secure a steady stream of income in retirement; the “carrot” it offers is a modest exclusion for a portion of the income from lifetime annuities purchased with after-tax savings.
ASR commissioned a poll earlier this year which showed that more working Americans aged 50-70 (50%) are concerned about making their retirement savings last their lifetime than are concerned with saving enough for retirement (38%). Conducted jointly by Republican pollster Bill McInturff of Public Opinion Strategies and Democratic pollster Mark Mellman of the Mellman Group, the poll also found that over 66% of older American voters are concerned about maintaining their living standard throughout retirement, and nearly half (48%) say they are more concerned about this than when they first retired. Of those surveyed, 59% said Congress should create an incentive for people to annuitize their savings so they last a lifetime.
When the new Congress convenes in 2007, it seems quite likely that the balance of power between Republican and Democratic parties will be even closer than now. As a result, when the new Congress considers the next generation of retirement security initiatives, it will be even more important that policymakers focus on ideas that can attract support from both sides of the aisle.
Bipartisan ideas with a solid policy foundation such as tax credits for automatic IRAs and tax exclusions for life annuity payments should be at the center of the discussion.