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BPC Panel: One-size-fits-all Solutions — Won’t

During the last week of July, the Bipartisan Policy Center hosted a panel on retirement security — and shared some interesting perspectives on the state of America’s retirement readiness. Pension professionals should understand these perspectives, as they could well find their way into future retirement policy proposals. 

Titled “Retirement Security: What’s Working and What’s Not?”, the panel featured James Poterba of MIT and the National Bureau of Economic Research; Andrew Biggs of the American Enterprise Institute; Ben Harris of the Brookings Institution; Lynn Dudley of the American Benefits Council, and Kristi Mitchem of State Street Global Advisors.

Early on, the panel embraced the notion of heterogeneity — the differences — in the various population segments as they both prepare for, and enter into, retirement. That heterogeneity complicates both a generalized assessment of the situation, and the crafting of potential solutions. 

While the notion of the traditional three-legged stool (Social Security, private pensions and personal saving) of retirement security was invoked, Porterba quickly acknowledged that only the top quarter of the nation’s income distribution actually relied on all three sources, and that a large fraction (85%) of the lower-income elderly relied primarily on Social Security as a retirement income source. He also noted, citing data from the Current Population Survey (CPS), that 44% of the income of those age 65 and older in the top income quartile is derived from working, compared with just 18% for Social Security, and 22% from pensions (though, as Andrew Biggs later noted, the CPS doesn’t include as income non-periodic withdrawals from 401(k)s or IRAs).

Porterba noted that the poverty rate among those 65 and older is 9.1%, compared with 15.0% among the total population, and that the elderly population has fallen over time. In fact, he noted that the poverty rate among the elderly was 24.6% in 1970, a time at which the overall poverty rate was 15.1%.

Mitchem said what was emerging as the “great divide” for the future regarding retirement preparation was plan size, rather than race, income level or gender, and that while other factors played a role, the largest plans were leveraging plan design to maximize the value of those programs via the expanding role of automatic plan features. Moreover, she noted that, while 89% of large employers offer retirement plans, just 14% of small employers do. 

As a means of expanding access for smaller plans, she cited broadening the use of multiple employer plans, or MEPs, by removing and/or adjusting some of the current restrictions on these programs. That includes eliminating the employer nexus requirement, safe harbor for participating employers and a model plan developed with specific automatic features. In response to a question later in the presentation, she noted that the cost for plans participating in this kind of arrangement could run 45-50 basis points, “all in” (including investment management fees).

Mitchem noted that, for all the concerns expressed about the costs of healthcare in retirement, those costs had held flat for the past decade at about 12% of income for older workers — though it is rising for those still in the workforce.

Dudley noted that the current retirement system works more like a pyramid than a three-legged stool, with a base of Social Security, home ownership, employment-based retirement plans, and then other personal savings and assets — that the relative significance of each component of the pyramid varied from household to household. She said that, while there are elements of the system that weren’t perfect, any contemplated changes should begin with a premise of “doing no harm.” Dudley noted that there are currently $23 trillion in assets earmarked for retirement, that near-retirees (aged 60-64) have higher account balances than the averages generally cited for the entire population, and that over 70% of workers earning $30,000 to $50,000 participate in workplace plans. She added that employer-sponsored plans provide a “culture of savings” that is routine and consistent, that it frequently provides employer contributions in addition to the worker’s personal savings and that it provides protections for those savings via the trust and fiduciary structure. 

Dudley also explained that tax incentives were the foundation of voluntary employer-sponsored plans, and that small employers need additional support. She took pains to remind attendees that the tax preferences accorded these programs was only a deferral of taxes, not a permanent revenue loss. 

Harris cited the gradual shift from savings (accumulation) to spending — bringing to the fore the question of how to help workers manage that spending, and the need for (insurance) vehicles that could help them do so effectively. He cited the recent regulations from Treasury that seek to encourage the addition of longevity annuities to retirement plans as a positive step, and spoke to the gap remaining in terms of having long-term care insurance alternatives. Finally, he noted that there was a need/opportunity to allow retirees a better way to access home equity in retirement.

The panel devoted some discussion to the efficacy of the current tax structure for retirement plans. While Harris expressed a sense that the record was, at best, “mixed,” he noted that we really don’t know how much net savings we are getting relative to the incentives provided. Mitchem took issue with that conclusion, citing the broad-based support of large employers in supporting a voluntary savings system, and contrasted that with the individual retirement account (IRA) savings rate/takeups. 

Asked whether or not there is a retirement crisis, Biggs noted that “if you personally are unprepared for retirement, it’s a crisis for you.” He said that you first need to look at who is unprepared for retirement, why are they unprepared for retirement, and then develop specific approaches to target those specific issues/situations. Dudley pointed out that the focus isn’t just on the individual, or their retirement resource pyramid at a particular time, but the variable situation of the household over time. She also noted, “if you don’t know what you’re going to need, or the rules keep changing on you, you’re at an enormous disadvantage.”

That said, she noted that people are retiring every day and leading very dignified lives in retirement, with far more income than they’d ever get from Social Security because of the existence of employer-sponsored plans.

The event was held under the auspices of the BPC Commission on Retirement Security and Personal Savings, a 19-member group representing a range of expertise and stakeholders in the retirement arena. Co-chairs of the commission are former Sen. Kent Conrad (D-N.D.) and James Lockhart, now an executive with W.L. Ross & Co. and former head of the Pension Benefit Guaranty Corporation. In the spring of 2015, after a year of deliberations, the commission plans to propose a series of “politically practical” reforms that it says would “simplify the retirement system and improve access to all Americans.”

Video of the event is available here.