The Senate Special Committee on Aging held a hearing about “Financial Security in Retirement: Innovations and Best Practices to Promote Savings.”
In his testimony, Gene L. Dodaro, Comptroller General of the United States and head of the Government Accountability Office (GAO), talked about the three pillars of the U.S. retirement system—Social Security, employer-sponsored plans, and individuals’ savings—and how they each face various risks and challenges.
Dodaro offered data to show how important Social Security is to many Americans, especially lower-income Americans. “Our analysis of data from the Federal Reserve Board’s most recent Survey of Consumer Finances (SCF) showed that in 2016, among households age 65 and over, the bottom 20%, ranked by income, relied on Social Security retirement benefits for 81% of their income, on average. But Social Security is facing financial difficulties that, if not addressed, will affect its long-term stability,” he said. The Social Security Board of Trustees 2018 report said current projections indicate that by 2034, the retirement program trust fund will only be sufficient to pay 77% of scheduled benefits.
According to Dodaro, the GAO designated the Pension Benefit Guaranty Corporation’s (PBGC)’S single-employer program as high risk in July 2003 and added the multi-employer program to its high-risk list in January 2009. “As long as PBGC’s long-term financial stability remains uncertain, the retirement benefits of millions of U.S. workers and retirees are at risk of greater reductions should their benefit plans be terminated below PBGC’s current guaranteed benefit levels,” he said.
Dodaro blamed the PBGC’s precarious situation on a couple of things. For one, as more employers have abandoned defined benefit (DB) plans, since 1985, there has been a 78% decline in the number of plans insured by PBGC and more than 13 million fewer workers actively participating in PBGC-insured plans. He also blamed the PBGC’s financial woes on the trend of single-employer plan sponsors transferring the liability for some of their participants to insurance companies via group annuity “buy-outs,” further reducing the number of participants in PBGC-covered plans. “As a result of these trends, even though PBGC premium rates have increased significantly in recent years, PBGC’s premium base has been eroding over time as fewer sponsors are paying premiums for fewer participants,” he noted.
He also pointed out that although individuals without access to a defined contribution (DC) employer-sponsored plan can save for retirement on their own, having access to an employer-sponsored retirement plan makes it easier to save, and more likely that an individual will have another source of income in retirement beyond Social Security. The GAO’s prior work found that employees working for smaller firms and in certain industries, such as leisure and hospitality, are significantly less likely to have access to an employer-sponsored plan compared with those working in larger firms and in certain other industries, such as information services. Also, it found that low-income workers are much less likely than high-income workers to have access to an employer-sponsored plan. Dodaro added that findings from the most recent SCF indicate that an individual’s ability to accumulate retirement savings depends on the individual’s income level. In addition, the disparities in average account balances by income level have increased markedly over time.
He touted automatic enrollment and auto portability as ways DC plan enrollment and contribution levels can be encouraged. He also suggested that offering systematic withdrawals or lifetime income options to DC plans can help DC plan participants manage retirement income.
As for personal savings, Dodaro noted that over the past several decades, the personal saving rate—which is calculated as the proportion of disposable income that households save—has trended steeply downward, from a high of 14.2% in 1975, to a low of 3.1% in 2005, before recovering somewhat to 6.8% in 2018. “The decline in the U.S. personal savings rate over time is concerning and could have implications for retirement security, particularly when coupled with the recent trend of low wage growth. After accounting for inflation, average wages remain near the levels they were in the 1970s for most individuals, adding to the difficulty of increasing their level of saving,” he said.
Dodaro contended that retirement issues have been addressed with an incremental approach. He pointed out that at least 25 laws pertaining to retirement have been enacted since the Employee Retirement Income Security Act (ERISA)—a couple that made large changes to the retirement system, but many that were targeted to just a couple or few issues. In addition, the number of agencies that play roles in the current retirement system has contributed to the incremental approach to addressing concerns, with no single federal agency being responsible for taking a broad view of the system as a whole. Having multiple agencies involved in the system has also contributed to a complex web of programs and requirements, he said.
Dodaro testified that a panel of 15 retirement experts convened by the GAO in November 2016 agreed that there is a need for a new comprehensive evaluation of the U.S. retirement system. In its 2017 report, it suggested five policy goals for a reformed U.S. retirement system as a starting point for discussion: promoting universal access to a retirement savings vehicle, ensuring greater retirement income adequacy, improving options for the spend down phase of retirement, reducing complexity and risk for both participants and plan sponsors, and stabilizing fiscal exposure to the federal government.
The GAO recommended that Congress consider establishing an independent commission to comprehensively examine the U.S. retirement system and make recommendations to clarify key policy goals for the system and improve the nation’s approach to promoting more stable retirement security. It suggested that such a commission include representatives from government agencies, employers, the financial services industry, unions, participant advocates, and researchers, among others, to help inform policymakers on changes needed to improve the current U.S. retirement system.
In his testimony, John Scott, director of the retirement savings project at The Pew Charitable Trusts, commended the 2017 GAO report that calls for a comprehensive examination of the retirement system.
But, he also said many small business owners are not familiar with current plan options that are designed for small firms. In addition, the perceived high cost of starting a plan is deterring small employers from offering retirement benefits. “Policy initiatives that reduce plan startup costs and improve awareness of SIMPLE and SEP plans could be useful in encouraging new plans,” he suggested.
Scott also pointed to Pew research that found executives of small to mid-size businesses saw benefits to the idea of a multiple employer plan (MEP), which allows employers to combine to offer a single plan that achieves economies of scale and lower costs. The survey found that 85% of employers said they would find an MEP somewhat or very helpful. Most businesses without a plan strongly or somewhat supported each of the individual elements of the MEP. Sixty-one percent of employers without plans said they would definitely be or might be interested in participating in such a program.
Denis St. Peter, president and CEO of CES, Inc., first shared with the committee how his company used the addition of a matching contribution and aggressive education and one-on-one employee meetings with advisers to improve its 401(k) plan from a 62.3% participation rate and 3.9% average deferral rate in 2010 to an 89.5% participation rate and 13.9% average deferral rate in 2018.
Recommendations he made for changes to the tax rules governing DC plans to facilitate greater employee retirement savings included:
- Increase the annual deferral limits and catch up contribution to promote and incentivize more retirement savings;
- Eliminate the required minimum distribution (RMD) starting at age 70 ½;
- Changing nondiscrimination rules so that those employees who are in a position to save for retirement are not as limited by the savings rates of those employees who are less able to save for retirement;
- Incentivize very small employers (1-25 employees) to create and maintain retirement programs by increasing contribution limits (including catch-up contributions) under SIMPLE plans; and
- Allow higher contribution limits under SIMPLE programs for other small employers (26-100 employees).
The testimony of Linda K. Stone, fellow volunteer at the Women’s Institute for a Secure Retirement, focused primarily on the unique challenges that women face in trying to achieve retirement financial security.
She pointed out that women face greater longevity risk than men due to their longer lives and the resulting need for more income. However, she said having more income during retirement starts with earnings during working years and access to employer-sponsored retirement plans, and generally, women of all races and ethnicities earn less than men throughout their lifetimes, and in addition, caregiving responsibilities for children and/or parents as well as spouses causes women to spend years out of the job market or to work part-time without access to benefits. Stone added that Social Security reports that, on average, women have nine years with zero earnings, and women’s careers average 29 years compared to 39 years for men. The zero earnings are compounded in the calculation of their Social Security benefit.
“The reality of today’s retirement landscape is do-it-yourself, and do it right, or live at or below the edge of poverty in what are supposed to be your golden years,” Stone said. “The nature of today’s system of individual responsibility demands financial capability.” She pointed out that women as well as men tend to lack basic financial knowledge, which is often the reason for making serious financial mistakes. Both women and men need the best information and opportunity to access information to ensure that they do not make costly decisions. “This information should be targeted to women as spouses and caregivers, as well as to women as employees,” she suggested.
Stone told the committee there is a need for more basic resources to help people figure out how much they need to increase their savings by in order to retire with security. She offered a list of several issues that women are in particular need of learning about or better understanding:
- The impact of future inflation and taxes is often not included in planning for retirement despite the significant impact it can have on retirement income;
- Asset to income ratios are often not well understood and individuals are often confused about how much is needed for a secure retirement;
- Many individuals struggle to plan how they will draw down assets and need greater access to flexible income distribution options and guaranteed lifetime income options; and
- Longevity risk is poorly understood and not widely planned for.