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.
While there are a variety of mechanisms for tapping home equity to fund regular consumption needs in retirement – for example, homeowners can downsize, use a reverse mortgage, or sell their home and rent instead – these approaches have advantages and drawbacks.
Federal and state tax policy subsidizes the use of home equity for pre-retirement consumption, leaving many retired homeowners “burdened with debt and with less equity to support retirement security,” according to the report. The report recommends ending these subsidies by eliminating tax benefits for borrowing that reduces home equity.
The report also proposes strengthening programs that support and advise consumers on reverse mortgages, which can be a good option for some older Americans.
“Establishing a low-dollar reverse-mortgage option would facilitate smaller loans while reducing fees for borrowers and risk for taxpayers,” the report says
Munnell calls this “a wonderful recommendation.”
“Most households have more home equity than financial assets and could greatly improve their retirement security by tapping that equity,” she writes. “The Commission addressed the advantages and disadvantages of both downsizing and a reverse mortgage. Treating the house as a retirement asset is a great step forward.”
5. Improve Financial Capability Among All Americans
“Exposure to financial knowledge and planning should begin early in life, with schools, communities, employers, and federal and state governments all working to foster a culture of savings and to position individuals to make prudent financial choices,” the report states.
The report recommends providing improved personal financial education through K-12 and higher education curricula and better communicating the consequences of claiming Social Security early.
“For example, renaming the earliest eligibility age, currently age 62, as the ‘reduced benefit age’ would better highlight the lower monthly benefits that result from early claiming,” the report states.
Munnell points out that the commission “appropriately did not spend much time on this issue.”
“The payoff to financial education is small,” she writes. “What we need is an easy and automatic retirement system.”
6. Strengthen Social Security’s Finances and Modernize the Program
According to the report, the current financing outlook for Social Security is unsustainable.
“Dedicated revenues for the program are insufficient to finance scheduled benefits,” the report states. “… Significant changes to the program are unavoidable, and workers need to know what to expect in order to plan appropriately. This can be achieved with balanced adjustments to the program that enhance progressivity, reduce poverty, and strengthen incentives to work.”
The commission’s recommendations for Social Security include applying the benefit formula annually to earnings to more evenly reward continued work. Currently the Social Security benefit formula applies to a worker’s average earnings, so it does not distinguish between higher earners who work fewer years and lower earners who work many years.
The report also recommends establishing a basic minimum benefit to enhance Social Security for beneficiaries with low incomes. “Starting in 2020, a modest additional amount would supplement standard Social Security payments for low-income beneficiaries above the full retirement age,” the report suggests.
Part of the commission’s recommendations also include changing the formula for calculating a Social Security beneficiary’s primary insurance amount.
The way the primary insurance amount formula currently works is the individual eligible for benefits will receive:
(a) 90% of the first up to $856 of his/her average indexed monthly earnings, plus
(b) 32% of his/her average indexed monthly earnings over $856 and through $5,157, plus
(c) 15% of his/her average indexed monthly earnings over $5,157.
The commission is proposing changes to both the average indixed monthly earnings and the primary insurance amount formula. Under the commission’s proposal, the individual eligible for benefits would receive:
(a) 95% of the first up to $1,095 of his/her average indexed monthly earnings, plus
(b) 32% of his/her average indexed monthly earnings over $1,095 and through $3,655, plus
(c) 15% of his/her average indexed monthly earnings between $3,655 and $5,157, plus
(d) 5% of his/her average indexed monthly earnings over $5,157.
Munnell’s concern with this is that the cuts to the top two income quintiles are “substantial.”
“Census data for 2014 indicate that the fourth quintile starts at $68,213 and the top quintile at $112,262,” she writes. “Many of these people are far from rich. They need Social Security as much as those in the lowest quintile because 401(k)s are not working. The Commission’s non-Social-Security proposals are unlikely to solve much of the problem. So, cutting back on Social Security will just leave more at risk.”
Other Social Security initiatives that the commission recommends in its report are to cap and re-index the spousal benefit; use a more accurate measure of inflation for Social Security’s cost-of-living adjustments; enhance survivors’ benefits to help widows and widowers maintain their standard of living; as well as tax 100% of Social Security benefits for beneficiaries with annual income above $250,000.
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