Retirement on the Rocks?
Current retirement savings policies continue to be under the wonk microscope in Washington D.C., and was the primary subject of an event at the liberal-leaning Center for American Progress last week. The event featured the work of Christian Weller, a Professor of Public Policy at the University of Massachusetts, Boston, and a Senior Fellow at the Center for American Progress.
While the discussion’s focus may seem be a bit academic, these are the kinds of perspectives that influence retirement policy, and ultimately the work that advisors do (or try to do). In these discussions, there is the threshold question of whether or not there is a retirement “crisis” in America. This question is important because of the famous Rahm Emanuel (former Chief of Staff to President Obama, now current Mayor of Chicago) maxim: You never want a serious crisis to go to waste. By that Emanuel meant that there is a political opportunity to achieve substantial policy objectives during or to address a crisis that would not exist in normal political circumstances.
Academics and thought leaders in DC policy circles who assert most loudly that our retirement system is in “crisis” also tend to advocate the most drastic policy changes to the current system. Weller is firmly in the “crisis” camp. He cited survey data from the Center for Retirement Research to conclude that our system is failing because 52% of working age households in 2013 said they expect to make substantial cuts in their spending when they retire, up from 31% of working age households in 1983. Of course, that is data based on speculation, not reality
His general criticism of the current system, which has various components, is that low- and moderate-income workers are left behind to fend for themselves in retirement and that too much money is spent, through the current structure of the retirement savings tax subsidies, on (relatively) wealthy individuals who don’t need it. In his view, low- and moderate-income earners are especially vulnerable in the current system because they have less access to retirement savings vehicles at work, do not get significant tax benefits if and when they do save, and are uniquely exposed to housing, market and labor risks that will undermine the accumulation of any housing equity or personal savings that these individuals manage to sock away. He argues that Social Security is the only program that addresses these three components in a meaningful way for low- and moderate-income earners, but that even Social Security needs to be updated and expanded.
His proposed reforms have four main components:
- increasing access to savings
- restructuring the tax incentives for retirement savings
- reducing market risk exposure
- increasing Social Security benefits in various ways
To address coverage, Weller proposes to create new savings opportunities outside of the employer-employee relationship, namely through the federal or state governments, that he argues are uniquely suited to provide low-risk, low-cost options for low- and moderate-income earners. Second, Weller wants to better target savings incentives to lower income households by replacing the current exclusion with a refundable tax credit, which he details in his Universal Savings Credit proposal. Third, Weller wants to mitigate market risk exposure by requiring risk disclosures for all financial investments, making low-risk investments the default option in savings programs, encouraging risk minimizing payout options, and incentivizing savings outside of housing.
Finally, Weller discussed his various proposals to expand and update Social Security. Weller would provide a new special minimum benefit for workers, tied to length of employment, that would create an income floor in retirement. He would increase benefits to all beneficiaries who reach 85 years of age to address longevity risk in retirement. He also proposes to increase Social Security’s survivorship benefits, a reform that would generally benefit women who tend to live longer than men.
The bill for these reforms? Well, that’s a topic for another day.Andrew Remo is the American Retirement Association’s Director of Congressional Affairs.