On February 25, the House Education and the Workforce Committee held a hearing on retirement and strengthening defined benefit pension plans.
In his opening statement, Chair John Boehner (R-OH) expressed his concern that Americans are not adequately planning and saving enough for their retirement. He cited an Employee Benefit Research Institute (EBRI) study that found, “American retirees will have approximately $45 billion less in retirement income in 2030 than they’ll need to cover basic retirement expenses.”
Ben Stein of the National Retirement Planning Coalition underscored the severity of the retirement savings crisis in the United States. Citing a Charles Schwab estimate that individuals need to save $230,000 for every $1,000 they will need in monthly retirement income, Mr. Stein pointed out, “The amount that the ordinary, average American family has saved for retirement is less than $50,000 a startlingly large fraction of pre-retirees, perhaps as much as 40 percent, have almost nil savings.” He also noted that many Americans have failed to plan for the “longevity risk” or outliving one’s retirement assets. According to the Society of Actuaries, “For those individuals that reach 65, more than 50 percent of single women and more than 40 percent of single men will still be alive at age 85. For married couples, in over 70 percent of the cases at least one spouse will still be alive at 85. Consequently, if these survivors had planned to have their retirement income last just until their life expectancy of 85, they would have depleted their retirement savings considerably before they die,” he stated. Mr. Stein argued that the challenge is even greater for women who live considerably longer than men, so their money will need to last longer in retirement.
Pointing out flaws in 401(k) plans, IRAs, and Roth IRAs, Daniel McCaw of Mercer Human Resources Consulting stated, “Because savings under these arrangements is voluntary, many workers particularly those at lower income levels choose (or are able) to save only minimal amounts, and a surprising number of workers put nothing aside in these voluntary arrangements.” He also noted that many retirees choose to take their retirement benefits as lump sums that create for themselves “a very real risk of outliving their retirement funds and, probably unknowingly, forfeit significant value in their annuity options.” Mr. McCaw argued that employer-maintained defined benefit plans are the best option to allow retirees to maintain their pre-retirement standards of living.
With regard to the longevity risk, Robert Henrikson of MetLife said that retirees should join a mortality pool. “Individuals cannot self-insure the risk of outliving their money because they cannot accurately predict how long they will live. Longevity creates a much smaller risk for large defined benefit pension plan sponsors since the ‘law of large numbers’ permits them to fund for the average life expectancy of the entire group of retirees. When a large group of retirees are pooled together, the retiree who lives a long time is offset by the retiree who dies early,” he stated.
Testifying on behalf of the Brookings Institution, Peter Orszag argued that the retirement savings system is flawed because higher-income households have the strongest incentive to save and tax subsidies are worth the least to households who need to save more for retirement. Citing the Congressional Budget Office (CBO), he stated, “Only about one-fifth of workers in households with income of below $20,000 participated in some form of tax-preferred savings plan (including an employer-provided plan or an Individual Retirement Account) in 1997. As a result, such lower-income workers represented 34 percent of all workers, but just 15 percent of workers who participated in tax-preferred savings plans and 55 percent of total non-participants in such savings plans.”
Mr. Orszag also addressed the “education gap,” citing an EBRI study that found only 45 percent of workers have attempted to figure out how much they will need to save for their retirement. “The evidence suggests that the impact of employer-provided financial education on lower-income workers is greater than on higher-income workers. Higher-income workers tend to be more financially sophisticated to begin with, and employer-provided education consequently does not benefit them as much as lower-income workers. Expanded financial education campaigns and more encouragement to firms to provide financial education in the workplace may prove to be beneficial in raising retirement security for lower- and moderate-income workers,” he said. During the question and answer session, Mr. Orszag reiterated his support for financial education, pointing out that individuals who are taught financial literacy in school tend to save more money when they enter the workforce.
