On January 27, the Senate Special Committee on Aging held a hearing entitled, “Retirement Planning: Do We Have a Crisis in America?”
In his opening statement, Chair Larry Craig (R-ID) noted that although “Americans are living longer and healthier than ever before” and “must plan to save more to keep them from outliving their retirement nest egg,” the Department of Commerce reports that the personal savings rate “has declined from 7.7 in 1992 to 2.3 percent in 2002.”
A researcher at the Employee Benefit Research Institute (EBRI), Dr. Jack VanDerhei, summarized the organization’s Retirement Security Projection Model, which was used to predict how much single females, single males, and families would need to save in order to live comfortably in retirement. He explained that the model’s objective was to “combine the simulated retirement income and wealth with the simulated retiree expenditures to determine how much each family unit would need to save today…for the remainder of the lifetime of the family unit.”
In EBRI’s report, the first figure showed the median percentage of compensation that must be saved each year until retirement for a 75 percent chance of covering basic retirement expenses (i.e., confidence level). Dr. VanDerhei pointed out that, for those in the highest income bracket, “…the percentages of compensation needed to be saved are 23.8 percent for single females, 13.9 percent for single males, and 6.1 percent for families.” The second figure assumed a 90 percent confidence level, and Dr. VanDerhei indicated, “…median single females are estimated to now need to save more than 25 percent of compensation, single males 22.1 percent of compensation, and families 10.1 percent of compensation.” As Dr. VanDerhei explained, the third figure “assumes that each worker contributes an additional 5 percent of compensation from 2003 until retirement age to supplement his or her Social Security and tax-qualified retirement plans,” and found that “single females tend to exhibit more vulnerability [to being at risk of insufficient retirement income] than single males while families are typically the least vulnerable.” For those individuals in lower income brackets, Dr. VanDerhei noted that there was little discrepancy between single females, single males, and families.
Dr. VanDerhei concluded, “For those lucky enough to be young and disciplined at saving, getting started now is likely to assure them a comfortable retirement.”
Dr. John Goodman of the National Center for Policy Analysis argued that for women “the failure to save adequately is a special problem.” He cited a study that found 1) Among employees age 18 to 62, the average in 401(k)s and similar accounts for women was half that of men; and 2) Among those nearing the retirement age, the average balance for women was only 20 percent of that of men. “In general, women more than men are experiencing the problem of inadequate retirement incomes,” Dr. Goodman stated. He went on to explain, “This is partly due to the fact that many senior women live alone. Nearly half of all women over age 65 are widows. This is important because compared to two-person households one-person households have smaller retirement savings, smaller Social Security benefits and less personal savings. Of seniors living in poverty, almost three-fourths are women.”
Dr. Goodman also pointed out a number of flaws with current employer-sponsored retirement plans. First, he argued that defined-benefit plans are “not in sync with the needs of a dynamic, mobile labor market,” because “people will sacrifice substantial pension benefits if they switch employers frequently throughout their career, even though they remain fully employed for their entire work lives.” In comparison, he notes that defined-contribution plans “place the responsibility for saving and investing on the employee[s]…As long as the employees are fully vested, they do not lose the employer match if they move to another employer.” Although vesting periods can be no longer than three years, Dr. Goodman argued, “…even a three-year vesting requirement has a disparate effect on women and interferes with workforce mobility.”
Dr. Goodman indicated a number of other problems with current retirement plans, including arbitrary limits on contributions; investment advice that may not be reliable; tax deferral through 401(k)s that may not be best for every individual; high administrative cost and management fees; cashing out of retirement plans with a job change; and rules permitting hardship withdrawals. A final flaw is that many employees make poor investment choices. Dr. Goodman notes, “Interestingly, there are important differences in the investing behavior of men and women when other things are equal. On the one hand, a number of studies have found that women are more risk adverse. For example, they are significantly more likely to choose bonds over stocks given a choice. On the other hand, men are more likely than women to engage in frequent changes in their portfolios. Such excessive trading reduces the net returns on men’s investments by a full percentage point, relative to women.”
Testifying on behalf of the Cato Institute, Jagadeesh Gokhale made a number of recommendations on how to prevent the future retirement crisis. He said that Congress must “provide effective incentives for Americans to save and invest,” and “maintain a credible low-tax environment for increasing the effective labor force.” He also indicated that Congress should “move away from continuing to finance the transfer of consumption toward retirees through pay-as-you-go programs such as Social Security and Medicare.” In his conclusion, Mr. Gokhale said that the Administration’s proposal for Retirement Saving Accounts and Lifetime Saving Accounts “should be more effective in encouraging greater net saving…However, their ultimate efficiency in increasing saving and investment will also depend upon how current and future tax and spending changes make up the lost federal revenue.”
