On May 5, the House Financial Services Subcommittee on Domestic and International Monetary Policy, Trade and Technology examined proposals to reform Social Security, including the federal Thrift Savings Plan (TSP).
In her opening remarks, Chair Deborah Pryce (R-OH) stated, “We know that the United States is wonderfully unique in its history, its economy, and its people. And therefore, the lessons learned by the systems that work well or do not work well in other countries may not be directly analogous to the United States. Differences in populations, life expectancy, and saving rates are just a few examples of the fine nuances that can make the application of the same policies yield dramatically different results. Indeed, our goal should not be to mimic the retirement programs of other nations. Rather, we should aim to enact a system that is tailor-made for the people and economy of the United States.”
Rep. Pryce also stressed the importance of financial literacy, stating that it “empowers individuals to manage money, credit, and debt and become responsible workers, heads of households, investors, entrepreneurs, and business leaders. While Congress can make laws and provide savings vehicles for Americans’ retirement through Social Security or personal retirement accounts, only with an overall understanding of financial services can a person truly benefit from an investment in their future. We must continue to do more to reach out to more people.”
Estelle James, a consulting economist on Social Security issues for the National Center for Policy Analysis, summarized the findings of her report on other countries that have reformed their retirement systems: “Most of the countries we examine in this study began with traditional pay-as-you-go defined benefit systems, similar to the United States. When these countries reformed their retirement systems, they shifted part of the responsibility for benefits to the private sector, usually to defined contribution plans, also known as personal accounts.” She explained that all countries retained a progressive public benefit in addition to the private benefit. In addition, they all guaranteed a minimum benefit for workers participating in the system. This is “especially important for women, who are at a greater risk of old-age poverty than men due to their longer life expectancies and time spent out of the labor market,” Ms. James stated, adding that “in Latin American countries, wives are also protected by a group survivors insurance policy that covers all workers and by a requirement that, upon retirement, husbands purchase a joint pension from their individual accounts. Widows of retirees get a survivor’s benefit but it is financed by their husbands rather than by taxpayers. Widows get to keep their own pension in addition to the joint pension. In Chile, Argentina and Mexico, the minimum pension combined with the joint pension mean that the relative position of women is projected to improve after the pension reform. The lifetime benefits of married women with full work careers are projected to exceed the lifetime benefits of men.”
In offering suggestions for the United States, Ms. James stated, “Compared with other industrialized countries, the United States currently has a trust fund surplus and a relatively small pension debt stemming from our younger population which makes it easier to divert some of the current payroll tax into personal accounts,” but noted, “Some young and low-income workers do not participate, or withdraw their savings before retirement, and many small employers do not offer any retirement plan for their workers. If we wanted to make employer-sponsored 401(k) plans part of our Social Security system, we would have to regulate them more tightly and make participation mandatory.” Ms. James also pointed out that with personal accounts, there is “a risk that workers with low wages or workers who spend a number of years out of the labor market will have insufficient balances in their personal accounts to provide adequate retirement incomes. This is especially important for women, who are likely to work fewer years and at lower rates of pay than men.” She added, “As we revise our system to include personal accounts, the United States needs to rethink how high the safety net should be, how it should be financed, and what linkages and trade-offs we want to make between work incentives and poverty prevention. In this context, we should seriously consider establishing a minimum pension as a way to redistribute income to low earners and protect retirees from investment risk.”
Patrick Purcell of the Congressional Research Service explained that the Thrift Savings Plan “is legally a ‘defined contribution’ plan. This means that it specifies how much an employee may contribute and how much the employing agency must contribute to each [federal] employee’s account. The employee owns the account and his or her benefit is equal to the account balance, which can be taken as a lump-sum, an annuity, or a series of periodic withdrawals.” He also noted that participants could borrow from their accounts in the form of a general purpose or residential loan. “General purpose loans can be obtained for any purpose, with a repayment period from 1 to 5 years. Residential loans can be obtained for the purpose of purchasing a primary residence, with a repayment period from 1 to 15 years.” In addition, after leaving federal service, “participants may elect benefit withdrawals in the form of a partial withdrawal or a full withdrawal as a single payment, a series of payments, or a life annuity.” Citing the success of the program, Mr. Purcell stated, “As of March 31, 2005, there were 3.4 million participants in the Thrift Plan, with approximately 2.5 million contributing to the plan. Among employees covered by FERS [Federal Employees’ Retirement System], 86% of those participate. Among CSRS [Civil Service Retirement System] employees, about two-thirds participate. Assets of the plan totaled $154 billion as of March 31. In terms of both assets and number of participants, the Thrift Savings Plan is the largest employee-sponsored retirement savings plan in the United States.”
Francis Cavanaugh, a public finance consultant, explained that the Thrift Savings Plan “is administered by just one employer the U.S. Government with extensive personnel, payroll, and systems staff to provide the essential employee education, retirement counseling, payroll deduction, timely funds transfers, and error correction functions.” Observing that the administration has stated its intention to model its reform proposal after the TSP, she stated, “The Administration’s plan is intended to reach all employees, but it makes no provision for the performance of what are now essential employer functions in 401(k) plans. They could not possibly be performed by small business employers who are now responsible only for the relatively simple payroll deduction and transmission of Social Security taxes to the IRS…These are barbershops, beauty salons, garages, restaurants, laundries, lawn services, households, nanny services, and other very small businesses that could not be expected to meet the high fiduciary standards required of those responsible for educating and counseling employees, for presenting a new plan in the context of the employer’s existing pension or other benefits, and for the timely and accurate transfer of funds for investment.” Mr. Cavanaugh also noted that “unlike the TSP, the Administration’s plan would prohibit loans and emergency withdrawals, and would require individuals to purchase annuities on retirement.” He urged Congress to support proposals that would diversify Social Security trust fund investments, stating, “The trust fund alternative, compared to IAs [individual accounts] would involve less government influence over private companies, would be less disruptive of financial markets, would save tens of billions of dollars a year in administrative costs, and could be effective virtually immediately, rather than the 2009 starting date proposed for IAs.”
