On May 19, the House Ways and Means Committee held a hearing on retirement policy challenges and opportunities. In a press release announcing the hearing, Chair Bill Thomas (R-CA) stated, “The Baby Boom generation will redefine aging in America, just as it has every other segment of life. It is critical for Congress to review the programs that will serve an aging population and make the necessary adjustments now to provide Americans with a secure retirement.”
Former Rep. Hal Daub (R-NE), chair of the Social Security Advisory Board, said that the primary challenge facing the United States “is the aging of our society as a result of the twin demographic shifts of lower birthrates and longer lives,” adding, “We currently have a workforce that has benefited from the postwar baby boom, the increased participation of women workers, and large improvements in skills and education levels. But the oldest of the baby boomers turn 60 next year and we can clearly see a future in which the ratio of the retirement age population to the working-age population will be growing substantially. Moreover, with continually increasing life spans, the population of those in their 80s and 90s and beyond will also be growing and placing increasing demands on our ability to provide health services and long-term care.”
Arguing that the need to restore the solvency of Social Security is an opportunity to improve flaws in the program, Rep. Daub stated, “The basic construct of the program is sound, with a benefit formula that recognizes the need to replace a greater portion of the pre-retirement earnings at the lower end of the scale in order to maintain an adequate standard of living. Over the last third of a century, largely because of Social Security, the poverty rate among the aged has been cut from nearly 25 percent to a little over 10 percent. That is a remarkable achievement, but in changing the program we should look for the opportunity to do even better, and we need to look for aspects of the program that have not done so well. For example, older women, particularly those who are widowed, divorced, or single still have poverty rates approaching or exceeding 20 percent.”
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: “For example, a taxpaying couple with $6,000 in deductible IRA contributions saves $1,500 in tax if they are in the 25 percent marginal tax bracket, but only $600 if they are in the 10 percent bracket. The income tax incentive approach thus provides the smallest benefits to the middle- and lower-income families in the lower marginal tax brackets, who are the ones most in need of saving more for basic needs in retirement.” He urged Congress to reform retirement plans, such as 401(k)s, to include the following: automatic enrollment; automatic escalation or a raise in the contribution rate whenever the employee experiences a pay increase; automatic investment in “balanced, prudently diversified, low-cost vehicles, such as broad index funds, life-cycle funds, or professionally managed funds”; and automatic rollover when an employee changes jobs. Mr. Orszag also noted that Congress could remove the “penalties” on saving. “In particular, the asset rules in means-tested benefit programs often penalize any moderate- and low-income families who do save for retirement in 401(k)s or IRAs by disqualifying them from the means-tested benefit program,” he stated, adding, “The major means-tested benefit programs, including Food Stamps, cash welfare assistance, and Medicaid either require or allow states to apply asset tests when determining eligibility…The asset tests may force households that rely on these benefits or might rely on them in the future to deplete retirement savings before qualifying for benefits, even when doing so would involve a financial penalty. As a result, the asset tests penalize low-income savers.”
