Retirement Income Policy Needs a Facelift

With “Peak 65” just around the corner, America’s patchwork retirement income policy is showing its age.

The impact of decisions made, policies implemented and how it has lived its life over the last 30 years have created wrinkles that are becoming more and more visible. The most obvious include:

• Fewer and fewer workers covered by defined benefit pension plans.
• Inadequate levels of retirement income generated by defined contribution plans.
• Pressure on the financial strength of the Social Security retirement benefit, as the number of workers supporting the program declines.
• Low levels of private retirement savings.
• Households needing to plan to pay for essential living expenses over longer life expectancies.
• Higher projected future medical expenses for retirees.
• Unfunded long-term care protection for individuals.

What is becoming obvious for all to see is the existing policies are not resulting in satisfactory retirement income outcomes for Americans. This is now visible as more and more individuals retire without any source of protected lifetime income other that their Social Security retirement benefit.

In fact, we are heading to a retirement crisis as more and more individuals depend on Social Security for the bulk of their retirement income and realize they will be unable to sustain even the most basic lifestyles in their older age. Our retirement income policy needs a rather dramatic facelift.

The policy decisions made over the last 30 years have created a system that is fundamentally based on defined contribution retirement plans and incentives for private savings. These policies were implemented during a time of wage stagnation for workers and ever-increasing living costs, which have limited private savings.

Unfortunately, there is no available quick fix, no easy way to make the wrinkles disappear. What is needed for coming and future retirees is a comprehensive facelift of existing policy rather than the continuous number of bandages that keep being applied.

The Bandages

Here are just some examples of bandages being applied to the problem:

• Creating incentives for lower income individuals to save for retirement where the income thresholds for these benefits are in reality below the poverty levels for most areas of the country.
• Increasing thresholds for qualified plan contributions at rates of inflation rather than increasing them to reflect the existing deficit most individuals have in their retirement savings.
• Postponing required minimum distributions that in reality benefit higher income and higher-asset households with adequate retirement savings.
• Creating regulations that lessen access to financial advice and product solutions.

The Facelift

If I were wielding the scalpel, I would look to make the following changes to the face of retirement income policy:

• Focus on creating better income outcomes by targeting policy decisions at creating “livable” protected retirement income levels that allow seniors to have reasonable lifestyles considering today’s costs and needs. This will likely result in higher contribution limits for most all plans. Given likely lower future investment returns, higher saving levels will be needed.
• Solidify existing tax benefits of life insurance, annuities and qualified plans and better promote them. This is the “Save What Is Good” initiative.
• Work to remove government from the role of longevity insurer of last resort by emphasizing private-sector solutions. As we continue to see, the government is stepping in to provide cash funding for certain underfunded retirement plans as evidenced by the recent contribution of over $80 billion to multi-employer plans as part of the American Rescue Plan. This “finger-in-the-dyke” approach will likely continue unless funding focus changes.
• Provide refundable tax incentives for households to obtain retirement planning advice.
• Incent actions to fully fund defined benefit plans rather than allow companies to kick the funding can down the road. Recent congressional conversations to allow companies to calculate pension liabilities assuming higher long-term rates of return do not reflect reality, nor do they provide the assets needed to pay future benefits.
• Realistically reform Social Security to recognize the need for funding promised benefits while at the same time providing higher levels of benefits for low wage earners. This will impact the coming cohort of lower wage retirees that are near collecting benefits and have no time to save more for retirement.
• Lobby hard to restrict efforts to tax inside build-up of life, annuity and qualified savings plans as a potential source of revenue to fund spending initiatives.
• In light of efforts to fund carbon saving initiatives and rebuild our infrastructure, create new long-term investable assets, possibly tax advantaged, for companies and households to purchase to support their need for lifetime income and related benefits.

Time to Iron

We all look in the mirror each morning and see the results of how we have lived our lives. From spending too much time in the sun to unhealthy eating habits we can see the impact on our faces.

The same is happening with respect to U.S. retirement income policy. The existing patchwork system is producing a significant number of unnecessary wrinkles and is not delivering satisfactory retirement income outcomes for most Americans.

We can do better.

It will just take leadership, compromise and, above all, a focus on outcomes. We can make the wrinkles go away for good and improve the quality of later life for millions of Americans.

Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network, and managing director of Insurance Insight Group. He is also the author of The FinancialVerse personal finance books and of a new book, Today’s Annuities — A Tool to Create Protected Lifetime Income.

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