A new report from the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings identifies several approaches to help boost Americans’ savings and strengthen retirement security.
“Retirement and savings policies have evolved over the decades into a true public-private partnership,” the commission’s co-chairmen write in the report. “Assets in workplace retirement savings plans and individual retirement accounts (IRAs) have grown dramatically over the last four decades, but too many Americans are still not preparing adequately. Social Security remains the base of financial support in old age for most Americans, yet the program faces substantial financing problems.”
The BPC launched the commission in 2014, and its 19 members have carefully reviewed the issues and explored many potential approaches to boost savings and strengthen retirement security.
In a commentary on MarketWatch, Alicia Munnell, a retirement expert and professor at Boston College, provides her view on the BPC’s recommendations.
“The recent report … reflects a lot of work and thought by knowledgeable committee members and a superb staff headed by Bill Hoagland, a former high-level Senate staffer,” Munnell writes. “But the Commission’s failure to recognize the limitations of safe harbors and tax credits for 401(k)s and, most importantly, its recommendation to cut Social Security severely limits the usefulness of the document.”
This report presents a package of bipartisan proposals to address six key challenges. Here are those challenges and the commission’s recommendations – along with Munnell’s response to them:
1. Improve Access to Workplace Retirement Savings Plans
As the report points out, tens of millions of American workers lack access to retirement plans, which data shows can be detrimental to their retirement savings.
According to projections from the Employee Benefit Research Institute, 56% of those without ongoing access to a defined contribution retirement plan will run short of money in retirement. In contrast, only 12% of those who will have access to a DC plan for at least 20 years will run short.
The report recommends a federal solution, proposing to mandate that employers with 50 or more employees automatically enroll their workers in a 401(k) or defined benefit plan; an enhanced MyRA; or a new “Retirement Security Plan.”
The Retirement Security Plans would allow small employers to transfer most responsibilities for operating a retirement savings plan to a third-party expert, while still maintaining strong employee protections, according to the report. The report also recommends enhancing the existing myRA program to provide a base of coverage for those workers, such as part-time, seasonal, and low-earning workers, who are least likely to be offered a retirement savings plan.
The proposal also includes new tax incentives to encourage employers to adopt automatic enrollment and escalate their employees’ contributions over time.
The report recommends establishing a nationwide minimum-coverage standard to pre-empt the patchwork of state-by-state regulation that is already developing.
“Beginning in 2020, employers with 50 or more employees that do not already offer a retirement plan that meets certain minimal thresholds would be required to automatically enroll employees into a new Retirement Security Plan or myRA,” the report states. “This would ensure broad access to workplace retirement savings plans while minimizing the burden for employers. Employees would have the ability to change contribution amounts or opt out of contributing entirely.”
According to Munnell, though, this proposal would likely only pick up a third of the uncovered. It would miss “those at firms with fewer than 50 employees, uncovered workers at firms where the employer provides a plan, and the 16% of the work force who are self-employed or work as contractors,” she says.
2. Promote Personal Savings for Short-Term Needs and Preserve Retirement Savings for Older Age
Americans need to increase their personal savings so that they are better positioned to handle emergencies and major purchases. Insufficient short-term savings can lead workers to draw down their retirement accounts, incurring taxes and (often) penalties.
“This ‘leakage’ of retirement savings — while it might address an immediate financial squeeze — jeopardizes many Americans’ long-term retirement security,” the report states.
The report recommends changes that would allow employers to automatically enroll employees into two savings accounts – one for short-term needs and one for retirement.
The report also proposes an easier process for transferring savings from plan to plan, because “many pre-retirement withdrawals occur upon job separation,” the report points out. It also recommends early-withdrawal rules and penalties for workplace plans and says IRAs should be harmonized by raising IRA standards.
Munnell calls these proposals a “step in the right direction.”
3. Reduce the Risk of Outliving Savings
The report recommends that plan sponsors integrate sophisticated but easy-to-use lifetime-income features within retirement savings plans.
“For example, it should be easy for plan participants to purchase a guaranteed lifetime-income product in automatic installments,” the report states. “Plan sponsors could establish a default lifetime-income option or offer an active-choice framework, in which participants are asked to choose options from a customized menu.”
The report also suggests that in-plan tools could help participants make an informed decision about when to claim Social Security benefits and then schedule withdrawals from their retirement plan to facilitate later claiming of those benefits.
The report also recommends clearing barriers to offering a wider array of choices for lifetime income in both retirement savings and pension plans.
According to Munnell, these proposals seem “like a good idea, as long as someone has an eye on fees.”
4. Facilitate the Use of Home Equity for Retirement Consumption
According to the report, Americans own more than $12.5 trillion in home equity — “a sum that rivals the $14 trillion that Americans hold in retirement savings.”
The report points out that homeownership can be a major source of retirement security for individuals or couples who lack substantial savings in a retirement plan but who own their residence.