U.S. workers face a number of risks in both accumulating and preserving pension benefits, the Government Accountability Office says in a new report.
The agency notes alternative retirement plan designs, such as those used in several European nations, may help cut those risks. But they also present trade-offs and costs for workers and employers
Important disadvantages may arise with mandating coverage and contributions, guaranteeing investment returns and annuitizing benefits, the report said.
For example, “mandatory approaches reduce risks but also raise concerns about the impact of higher benefit costs, particularly on small employers,” the report said.
The report, prepared at the request of members of the House Education and Labor Committee to provide options for dealing with problems with the current U.S. pension system, also touches on use of annuities as a source of adequate income in retirement.
A problem with annuities is that because not every citizen buys them, insurers inevitably have to charge higher premiums to cover “adverse selection”–wherein annuity buyers tend to be people who have reason to believe they will live long lives.
The report suggests that to reduce premiums for annuities, efforts could be made to increase the number and type of workers who buy annuities and by providing access to group rates, which tend to be lower than rates for individual annuities.
Workers may not have enough retirement income because only half of the U.S. workforce was covered by a pension plan in 2008, according to a national survey cited in the report.
Moreover, those covered by deferred compensation plans risk making inadequate contributions or earning poor investment returns, while workers with traditional defined benefit plans risk future benefit losses due to a lack of portability if they change jobs.
“Preretirement benefit withdrawals, high fees and the inappropriate drawdown of benefits in retirement also introduce risks related to preserving benefits, especially for workers with DC plans,” the report said.
But problems also exist in alternative approaches, such as those offered by the private pension systems in the Netherlands, Switzerland and the United Kingdom, the report said.
For example, in the Dutch and Swiss systems, sharing investment risk requires assets to be pooled and thus limits individual choice.
Additionally, while annuitizing benefits at retirement can lessen longevity risk, doing so also limits retirees’ access to their assets, the report said.
The report also looked at other proposals, such as a guaranteed retirement accounts plan and SuperSimple and universal 401(k) plans. But the report also saw drawbacks to these proposals.
Mandating that employers provide retirement benefits or workers to participate and contribute to a pension plan ensures that most, if not all, workers will have some level of retirement income beyond Social Security, the report said. However, such mandates also can pose burdens for some workers and employers.
GAO said that several retirement experts and industry professionals agree that making participation mandatory is a way to increase retirement plan coverage.
“However, such mandates represent a significant departure from the existing voluntary private pension system in the United States, and several retirement experts said that their adoption may not be feasible,” the report said.
Furthermore, “requiring workers and employers to contribute to any type of pension plan diverts funds from other uses, including employers’ business expenses and workers’ competing demands for basic necessities.”
Increasing contributions to a pension plan by reducing workers’ current compensation also creates problems, the report said. “The impact of this diversion may be disproportionately greater for lower-income workers and small businesses whose financial resources are more constrained,” it stated.
Voluntary approaches to increasing coverage and contribution rates allow individual workers and employers to choose whether or not to participate in a pension plan. “But, as the current system illustrates, this approach cannot ensure that all workers will be covered by a pension plan,” the report said.
Voluntary approaches such as an auto-enrollment approach that allows workers to opt out or default contribution levels and automatic contribution escalation, as used in the Super Simple and Universal 401(k) plans, can help overcome workers’ inertia “because they do not require active decision making about the extent of their participation and are effective alternatives to a mandate,” the report said.
“However, increasing participation also may increase costs for employers that contribute to DC plans, because now they would be making contributions for a greater number of workers, unless they reduced the amount of their contributions to all workers to keep the total cost the same.”
“In addition, because such approaches are still voluntary, some workers will continue to lack coverage or contribute too little,” the report said.