The more things change, the more they remain the same. In the early 1980s, the nation faced a serious retirement challenge, with Social Security estimated to have unfunded liabilities of about $6 trillion and worries about whether the Greatest Generation would be able to afford its retirement.
Flash-forward almost 30 years. Today's headlines talk about a $5 trillion shortfall in Social Security and concerns about how the Baby Boomers will be able to pay for their retirement.
The Boomers, unlike their parents, are not followed by a large cohort of workers whose contributions can pay for retirement benefits. Generous defined-benefit pension plans and other guaranteed income sources are largely a thing of the past. Extended lifespans and high healthcare costs threaten retirement security.
In fact, today's retirement savings status quo threatens to inflict even more severe financial stress on future retirees, who may be hard-pressed even to pay for such necessities as food, housing and medicine.
The severity of this challenge means we need to strengthen all of America's retirement savings systems, public and private, and build a truly robust, resilient and secure system that can reliably replace pre-retirement income-and we need to begin now.
There are three major steps we can take: Make Social Security solvent; expand and strengthen workplace savings plans; and promote lifetime income options.
Step #1: Social Security Solvency. Tackling Social Security should be the first step in this effort, for two reasons.
First, it is an immediate problem. In March, we learned that the nation was paying out more in Social Security benefits than it was taking in from Social Security tax. This was something that had not been expected to happen until at least 2016, but occurred sooner because of the slow recovery from the recession-tax collections were down, and discouraged older workers were retiring early.
Yet, while the system may temporarily swing back into balance for a few years, the unexpectedly early swing into negative cash flow is an alarm bell in the night, reminding us that the solvency of our retirement system is not theoretical.
Second, the projected Social Security shortfall is more easily addressed than that of other entitlements. At $5.3 trillion, it is a little more than one-tenth of the total federal entitlement deficit, currently estimated at $46 trillion over the next 75 years. In current dollars, it also is only about half of the $6 trillion Social Security deficit we faced back in the early 1980s. While fixing Social Security would not be painless, it would be much more manageable than dealing with Medicaid, Medicare or other big federal programs.
Earlier this year, President Obama recognized the severity of the deficit challenge by forming a bipartisan National Commission on Fiscal Responsibility and Reform to offer recommendations on closing the federal budget deficit.
Now the President should charge his deficit reduction commission with focusing first on fixing Social Security by designing a package of revenue increases, benefit cuts and other changes needed to make the program solvent.
The commission should have only three constraints on its recommendations. First, there should be no impact on the benefits of current retirees or those within 10 years of full retirement age, since they have no time to adjust to changes. Second, the commission should not raise the Social Security payroll tax, since that would discourage job creation. Third, the commission should keep future retirement benefits intact for below-median income Americans, such as the one-third of retirees who receive 90% of their retirement income from Social Security alone.
The President should ask the commission to deliver a Social Security solvency action plan on the day after the 2010 mid-term elections, and then ask Congress to give the plan a straight up-or-down vote. I believe the President and Congress would find the nation behind them on any reasonable proposal. A recent national retirement income survey conducted by Putnam Investments showed that most Americans support Social Security reform; in fact, nearly 70% of those surveyed believe that it is vital for elected officials to close the Social Security gap.
Step #2: Strengthen Workplace Savings Plans. While Social Security currently replaces a significant, if declining, share of pre-retirement income for many retirees, even full solvency would not completely make up the difference between what Americans expect to have and what they will need in retirement. Personal savings and investments have to play a major part in a well-balanced retirement policy.
For a generation, one of the most effective ways of promoting such savings has been through workplace-based plans, such as the 401(k), 403(b) and 457 defined contribution plans. These plans now have more than 80 million participants who hold more than $4 trillion in assets.
In spite of their success, workplace savings plans remain underutilized. About half of all working Americans-78 million people-lack access to an employer-sponsored savings plan. And even most workers who have access do not make optimal use of their plans, failing to participate or, if they do, not investing enough to maximize their benefits.
These plans need to supply a greatly increased share of Americans' retirement incomes. And so the second step that President Obama and Congress should take is to extend workplace savings coverage to all American workers and make all existing workplace plans more automatic, to expand participation and raise the savings rate.
There are different paths to expanding access, including a universal IRA proposed by Deputy Treasury Secretary Mark Iwry (see related story, "Retirement Self-Starters," page one)or a significantly simplified, low-cost version of the 401(k) plan. The greatest beneficiaries of extended coverage would be younger, low-income and minority workers, whose employers do pay Social Security taxes, but who find the cost and complexity of establishing traditional savings plans to be too onerous.
Of course, having access to a savings plan and making use of one are two different things. Only about three in four workers whose employers sponsor a savings plan currently participate. To maximize the value of existing workplace plans, we need to increase this rate-and we should start by leveraging inertia-the inclination most of us have to continue doing whatever we have been doing.
If you're not saving money, that's bad; but, once you get into the habit of saving, inertia becomes a positive force.
The most effective way of leveraging inertia would be to speed the implementation of the core elements endorsed by the Pension Protection Act of 2006, including automatic enrollment; automatic savings escalation; and guidance into qualified default investment options, such as target-date funds, for workers who do not make their own investment choices.
Proof Positive
In each case, workers should be required to opt out of participation, rather than taking the step to opt in. By encouraging the use of these automatic features, workers will be much more likely to take the steps they need to save and invest.
In fact, many younger workers participating in auto-pilot plans today are on track to have higher income replacement rates than current defined contribution plan retirees are receiving-proof positive that auto-plan design can substantially solve the challenge of how to accumulate sufficient assets through workplace savings.
Step #3: Promote Lifetime Income Solutions. Higher participation in saving still leaves us with an unmet challenge on distribution-that is, helping retirees translate savings into income. After all, converting life savings into lifelong income through appropriate investments is even more challenging than accumulating a nest egg in the first place.
The President and Congress can do their part by supporting robust competition among lifetime income solutions, including both annuities and non-annuity variants. These products can be included directly in savings plans or offered as options for participants when they convert their plan savings into individual retirement accounts.
In order to unlock the full potential of these lifetime income solutions, retirement plan sponsors, service providers and other fiduciaries need to have confidence in these products and offer them to their participants.
To provide such reassurance, the President and Congress should create an optional national insurance charter that offers the consistent, nationwide oversight these products need to become more attractive.
Concurrently, the President and Congress should create a new regulatory body empowered to approve qualified lifetime income options. This agency would be empowered to not only review and approve income solutions, but to administer an industry-funded national insurance pool, much like the Federal Deposit Insurance Corp., to ensure that qualified lifetime income solutions actually deliver on their promises to plan participants.
Such oversight, together with legal safe-harbor protections similar to those offered under the Pension Protection Act, would embolden plan sponsors to offer lifetime income solutions to workplace savers.
More importantly, this oversight would support another key step: Requiring savings plans to offer their participants the option of choosing a qualified annuity or non-annuity lifetime income product for a portion of their savings. This would help to address the distribution issue while simultaneously lowering plan participants' longevity risk-the possibility they could outlive their savings. These steps would ensure that lifetime income truly does last a lifetime, no matter how long that life might last.
The damage done to retirement savings by the financial crisis shook the confidence of many Americans. Even while they acknowledge their own responsibility to save more, they do support additional moves by Washington, employers and the financial services industry to boost private savings. This support creates a generational opportunity for concerted action to comprehensively solve America's retirement savings challenge.
Ensuring the solvency of the Social Security system; strengthening the workplace savings system; and promoting lifetime income solutions are three key strategies for meeting America's retirement challenge.
We know we can do it. Three decades ago, with a similar crisis in Social Security solvency, President Reagan created a commission which helped to fix the program for a generation. And the creation of workplace savings plans at the same time launched a retirement revolution which has helped millions to retire securely.
Faced with similar challenges today, we can create a more robust, more reliable and fundamentally more decent retirement system.
If we do, the benefits would be significant. Future generations of Americans could feel more secure and more empowered in their working lives: be more willing to change jobs, learn skills, start a business or pursue a dream. And there would be major, positive psychological impacts-on global confidence, on the value of the dollar and on Americans' own national morale, our sense that we can control our destiny and ensure our solvency. That is a goal worth struggling for, and 2010 is the year to start making it a reality.
(c) Copyright 2010 Money Management Executive and SourceMedia Inc. All rights reserved.
