On April 12, the Senate Special Aging Committee held a hearing on the role of employer-sponsored retirement plans in increasing national savings.
Addressing the current shortfall in national savings, Chair Gordon Smith (R-OR) explained that the “average life expectancy of Americans has been steadily increasing. For example, the average life expectancy of Americans born in 1960 was about 70 years. Yet, in 2003, life expectancy was about 77. And although Americans are living longer than ever before, most Americans continue to retire before age 65. At the same time, the personal-savings rate in the United States has declined dramatically over the last two decades, reaching about one percent of personal income in 2004. The decline in our savings rate is a disturbing trend because as the length of retirement grows, Americans must save more not less to ensure a financially secure retirement.” In conclusion, Sen. Smith announced his intention to introduce legislation that would increase participation rates in employer-sponsored retirement plans.
Ranking Member Herb Kohl (D-WI) reiterated the concern that so few Americans are prepared for their “non-working years.” Specifically, he pointed out that pension participation rates are lower for low-income families and minimum wage employees and expressed his hope that future legislation would close the gap.
Assistant Secretary of Treasury Mark Warshawsky stated that “net private savings (gross private savings less depreciation on plant, equipment, and housing stock) as a share of national income averaged about 11 percent from 1955 through 1985, but since then has trended steadily down. Over the past ten years, it has averaged about 5-1/2 percent of GDP, or about 5 percentage points below where it was during the decades of the 1950s, 60s, 70s, and most of the 80s.” To address this decline, he explained that the Bush administration “has proposed Retirement Savings Accounts, which would replace the complex array of retirement savings incentives currently in the tax code, such as IRAs, Roth IRAs, and similar saving vehicles,” adding, “The President has also proposed Employer Retirement Savings Accounts to simplify the savings opportunities individuals have through their employers. The President’s Lifetime Savings Accounts would, for the first time, allow individuals to save on a tax-preferred basis for any purpose. This can be especially important to low-income individuals and families who need to save, but cannot afford to lock up funds for retirement that may be needed for an emergency in the near-term. The President also proposed Individual Development Accounts that would give extra financial incentive[s] to certain low-income families to set aside funds for major purchases, such as a first home.”
Eugene Steuerle, a senior fellow at the Urban Institute, said that research “shows markedly different retirement savings outcomes based on worker demographic characteristics, such as race, education, and marriage. For instance,
Mr. Steuerle offered a number of policy options for the committee’s consideration: 1) There needs to be greater restrictions on subsidies for deposits that are not leading to net savings and on early withdrawals of deposits that are not saved to cover retirement costs; 2) Simplification of defined benefit pension plans is long overdue; 3) Pension and retirement plans need to be designed around the needs of today’s workers, not those of the 1950s; 4) There is strong evidence that participation rates in employer-sponsored plans would increase significantly if more employers automatically enrolled their employees unless they chose to opt out; 5) More incentives should be provided to low-, moderate-, and middle-income taxpayers; 6) A “clearinghouse” should be established to help with the collection of rollover amounts, default rules for the management of investments, and the disbursement of benefit payments over time rather than all at once; and 7) Increasing personal retirement savings should be addressed as an issue separate from the debate on Social Security reform.
President of the American Benefits Council James Klein summarized the council’s long-term public policy strategic plan, Safe and Sound: A Ten-Year Plan for Promoting Financial Security, which “sets forth very specific measurable goals for the retirement (and health benefits) system to be achieved by the year 2014.” He explained that Safe and Sound’s first goal is to raise financial literacy among individuals. It specifically states, “by 2014, virtually all households will have access to some form of investment education and advice and nearly 75 percent of households will have calculated the amount of retirement savings needed to maintain their standard of living throughout retirement, as well as the savings rate necessary to achieve this target.” To achieve these goals, Mr. Klein outlined policy recommendations for Congress, which include allowing employees to receive financial education through their workplace or from a retirement plan administrator, supporting efforts to expand financial education, establishing financial literacy requirements for high school and college graduates, and promoting retirement planning through the Social Security program. With regard to employer-sponsored retirement plans, Mr. Klein encouraged Congress to create tax incentives that would encourage lifetime payouts, enhance the saver’s tax credit, increase tax incentives for retirement saving, and remove “complex and superfluous” rules in retirement plans.
