The Ways and Means Committee of the U.S. House of Representatives heard open testimony Wednesday morning from a stable of retirement and financial experts, with the stated goal of promoting solutions to American workers’ significant projected retirement savings shortfall.
Speakers included Diane Oakley, executive director, National Institute on Retirement Security; Nancy Altman, president, Social Security Works; Cindy McDaniel, co-director, Missouri-Kansas City Committee to Protect Pensions; Roger Crandall, chairman, president and CEO, MassMutual; Luke Huffstutter, owner of Annastasia Salon and Summit Salon Academy, Portland, Oregon; Robin Diamonte, corporate vice president, pension investments, United Technologies Corporation; and Andrew Biggs, resident scholar, American Enterprise Institute.
Given their diverse backgrounds, the speakers shared different points of emphasis in their testimony. However, all called on the lawmakers present to embrace bipartisanship and to enact commonsense solutions that enjoy the support of Democrats and Republicans alike.
Oakley’s testimony set out the serious challenges faced by U.S. workers in terms of saving sufficiently for retirement in a world in which private pension plans are increasingly on the decline. She noted that defined contribution (DC) plans present a strong framework for getting more Americans to save at more adequate levels, but not everyone has benefiting from the rise of DC plans.
“Some 100 million Americans do not have any retirement accounts,” she warned. “Today, four out five working age Americans have retirement savings equal to less than their annual income. The type of primary retirement plan coverage that private employers offer employees shifted way from defined benefit [DB] pension plans to defined contribution individual accounts, such as 401(k)s. This shift from DB to DC plans has increased the risks and responsibilities for individuals in planning and managing their retirement.”
Oakley suggested the shift toward DC plans has negatively impacted the bottom half of U.S. households by income, largely by lowering retirement plan coverage rates for those households. She suggested the median value of retirement wealth in DB and DC plans for households in the top five percent of households is over 100-times greater than the median retirement wealth of the bottom half of households.
“Workers, employers and policymakers should look closely at what we need to do individually and collectively, so that everyone can build sufficient assets to have adequate and secure income after a lifetime of work,” she said. “Workers need to find ways to sharpen their budgets and save more of their pay for retirement. The nation also needs its employers, especially small businesses, to become more engaged in assuring greater access to retirement plans in the workplace.”
As Oakley noted, proposals promoting automatic savings in DC plans and individual retirement accounts (IRAs) are taking shape in states across the county.
“By combining such automatic retirement savings with a transformation of the Savers’ Credit, Congress can boldly lead America and produce measurable progress for a majority of America’s workers,” Oakley suggested. “Acting sooner rather than later will greatly improve our future retirement security.”
Oakley went on to map out the even-more-severe savings challenges faced by certain demographic groups in the U.S., including women, racial and ethnic minorities, and employees of small businesses. She then proposed various potential policy solutions the committee could explore.
“One bold stoke would be to promote universal access to a retirement saving vehicle through employer payroll so all Americans could take that first important step to pay themselves first with a retirement contribution,” she said. “To improve retirement security the committee should also consider expanding and transforming the current tax credit for low- and moderate-income taxpayers who save for retirement. This Savers’ Credit is complex and burdensome for taxpayers and only a fraction of those eligible for the credit claim it. Transforming the tax credit into an ‘Uncle Sam Match’ and making it refundable would be another bold stroke.”
Altman’s testimony focused on what she called the foundational role that Social Security plays in the discussion of Americans’ retirement security. She urged wealthy Americans to consider the following anecdote.
“Though the wealthiest among us may not recognize Social Security’s importance to them, they might be enlightened by the cautionary tale of Neil Friedman, a millionaire who invested his entire fortune with Bernie Madoff,” she said. “When Madoff’s Ponzi scheme was revealed, Friedman and his wife found themselves forced to survive on their Social Security and money they could earn selling note cards emblazoned with photos of their former lavish vacations. As important as Social Security is for virtually all of us, it is especially important to women, people of color, those who are LGBTQ, and others who have been disadvantaged in the workplace. Those groups are less likely to have jobs with employer-sponsored pensions. On average, they have lower earnings and therefore less ability to save.”
Altman’s main suggested for the committee was to increase the benefits paid by Social Security. She suggested this would be one of the most efficient and effective ways to address the U.S. retirement savings shortfall.
“As vital and well-designed as they are, Social Security’s benefits are extremely modest by virtually any measure,” she said. “In absolute terms, the average monthly Social Security benefit in December, 2018 was $1,342, or $16,104, on an annualized basis. That is below the 2019 official federal poverty level for a two-person household, and substantially below the amount needed to satisfy the Elder Economic Security Standard Index, a sophisticated measure of the income necessary to meet bare necessities. Whether to increase or cut Social Security’s modest benefits is a question of values, not affordability.”
McDaniel’s testimony focused on the dire funding challenges faced by many (but not all) union-sponsored multiemployer pension plans. She strongly urged the lawmakers present to take up the Rehabilitation for Multiemployer Pensions Act, which was recently reintroduced by Ways and Means Chair Richard Neal, D-Massachusetts.
“People say there is no such thing as a magic bullet. But this bill is the magic bullet that will keep pension plans alive, save the benefits of more than 1 million retirees and workers and keep alive our communities and businesses that rely on our pension income,” she said.
Crandall’s testimony focused on the key role played today by private companies when it comes to promoting retirement security via DC plans.
“Our nation’s private retirement system—which is anchored by employer-sponsored retirement plans—has helped countless American workers achieve a financially secure retirement,” he said. “Existing tax incentives for private retirement savings have been a tremendous success in encouraging American workers to save for their own retirement and should be protected.”
At the same time, Crandall said, there are still significant gaps in the nation’s private retirement savings system, and more must be done to give more American workers the opportunity to achieve a financially secure retirement. From Crandall’s perspective, this includes broadening retirement plan coverage, especially among small employers; increasing savings in existing plans and accounts, for example through enhanced automatic enrollment; and facilitating guaranteed income for life, which protects retirees from outliving their retirement savings.
“We believe that Congress should take action to accelerate this process by reducing barriers that are currently preventing too many Americans from achieving a secure retirement,” Crandall said. “Accordingly, I am here today to convey MassMutual’s strong support for the committee’s efforts to eliminate barriers to workplace retirement plan coverage and increase retirement savings. And as discussed earlier, because lower participation and savings rates are disproportionately experienced by women, minorities, low-income employees, and employees of small businesses, we also urge the committee to take actions that are designed to increase retirement savings for those populations.”
Crandall in particular advocated for immediate passage of the Retirement Enhancement and Savings Act (RESA), the Automatic Retirement Plan Act (ARPA) and the Retirement Plan Simplification and Enhancement Act.
“I would also add that the open multiple employer plan language in ARPA and RESA would provide an excellent tool to address a growing need to address the retirement security of gig workers,” Crandall said. “As we all know, there has been dramatic growth in the gig economy.”
Huffstutter’s testimony focused on the benefits his small business employees have seen as a result of being able to participate in the state-run OregonSaves DC plan program.
“Unlike many workers in my industry, mine are W-2 employees, not contractors or stylists that ‘rent a chair.’ I am deeply invested in them, in their future, and in creating a company they choose to stay with,” Huffstutter said. “But we found one important missing piece: the lack of a retirement plan. And we are not alone. In my research, I’ve found that less than half of the businesses that are my size have any kind of retirement plan. Because of our commitment to our team, we have sought bids for reasonable retirement plan solutions 6 times over the past 10 years. But I have found that they either would cost me a lot to run or they would pass these costs on to my employees.”
Huffstutter said his full-time employees make around $50,000 a year, on average, and mostly they are not college educated, nor do they see themselves as financially sophisticated.
“Still, I would bring in financial advisers each year to speak with my team about the ways they could save,” he explained. “In all these years, only about 1 in 5 started any kind of savings plan, either because they didn’t understand the options well enough or because it was intimidating to make investment selections on their own. So when we heard about OregonSaves, we joined the program even before we were required to enroll. I believe that the genius of the program is the opt-out design. At my salon, every worker who didn’t already have their own IRA or other savings program has remained in OregonSaves.”
Huffstutter said OregonSaves is easy for his employees, and easy for him as the employer.
“The initial set-up took about an hour, and I spend maybe 15 minutes a month adding employees and making other minor revisions on the employer site,” Huffstutter said. “When I adopt a different plan, I just need to let OregonSaves know, and I will no longer have to participate. My team gets a savings program at minimal cost, and the program doesn’t cost me anything. Since July, 2017, my 27 employees in OregonSaves now average over 2200 dollars in their IRAs.”
Diamonte’s testimony offered the lawmakers a look at a large global employer’s DC plan system as it exists today, demonstrating how progressive plan sponsors are already finding ways to make DC plans deliver a benefit that looks more like the guaranteed DB plan benefit.
“UTC’s Lifetime Income Strategy provides a carefully constructed transition from wealth accumulation to income generation,” Diamonte explained. “When a participant is under age 48, the Lifetime Income Strategy is like a personalized target retirement date fund. Starting at age 48, assets begin to shift into a component that provides several key features plan participants typically look for in a retirement income solution—guaranteed cash flows, growth potential, flexibility, and continuing access to savings.”
This part of the portfolio is called the “Secure Income Sub-Fund.” By age 60, under the plan’s default design, the entire balance and all subsequent contributions to the Lifetime Income Strategy are allocated to the Secure Income Sub-Fund where it remains invested and secures a guaranteed lifetime income benefit.
“Participants in the Lifetime Income Strategy may activate and collect their income benefits any time after they reach age 60 and separate from service with UTC,” Diamonte noted. “Income benefits are adjusted up or down if activation occurs at an age other than 65 or if the participant chooses a joint life option. Once activation occurs, a participant may take plan distributions each year totaling as much as their annual income benefit, and the income benefit amount will continue for life, with payments continuing to the joint life recipient if applicable.”
If a participant’s account balance is exhausted, the insurance companies that guarantee the income benefits take over and make payments to the participant for the rest of their life.
“Liquidity is preserved so that participants may respond and adapt when they are faced with unexpected circumstances that inevitably arise during retirement,” Diamonte explained. “The value of this freedom and flexibility should not be ignored when making decisions regarding fundamental elements of a retirement income design. In fact, one of the most valuable features of the Lifetime Income Strategy is that it preserves the right to take some or all of the remaining balance out of the account without any surrender charges.”
The day’s final testimony from Andrew Biggs sounded something of a contrarian note compared with the earlier speakers.
“There simply is no retirement crisis,” he said. “Retirement incomes have been rising rapidly and the vast majority of retirees state they have sufficient money to live comfortably. Retirement savings have risen seven-fold since participation in traditional defined benefit pensions peaked in 1975 and retirement plan participation has increased. No system is perfect, but the notion that the retirement income system needs a wholesale redesign is entirely unjustified by the data.”
“Congress has over 30 years failed to reform Social Security and many Americans have little faith in the program,” Biggs continued. “If there is a retirement crisis, it is in retirement plans run by federal, state and local governments, whose unfunded liabilities exceed even the most pessimistic estimates of shortfalls in retirement saving by U.S. households. Because there is no retirement crisis, proposals such as to expand Social Security should be considered with caution.”
According to Biggs, expanding benefits could help low-income retirees, but middle and high-income workers would likely reduce their personal saving in response to higher expected Social Security benefits.
“Likewise, while tax increases would help address Social Security’s funding shortfalls, those same tax increases could increase borrowing and debt by low-income workers and reduce work and encourage tax evasion by high high-wage employees,” he said. “Even if there is no broad retirement crisis, severely inadequate retirement incomes are always a crisis to the retiree who suffers from one. Congress should not ignore gaps in retirement income security. Instead, we need to address problems where they occur while being aware of unintended consequences. In some cases such reforms would be targeted; in others, a broader rethinking of retirement income policy may be necessary.”