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It's Time to Take the Retirement Crisis Seriously

February 24, 2016

The lack of retirement security in the United States is a crisis we must face head on. If nothing changes, more than half of today’s working-age households will not be able to maintain their standard of living into retirement. Too many retirees rely only on the meager benefit provided by Social Security. The situation is worst in the private sector, where workers have been losing out as pensions have been frozen or cut in favor of less generous 401(k) plans. The defined-benefit pensions of state, local, federal and rail workers are under constant attack. Half of workers have no retirement plan of any kind at work, and far too many have saved little or nothing on their own.

For many working families, saving for retirement is a luxury they can’t afford. Wages have been essentially flat for decades, as only the very rich have benefited from our nation’s economic growth.

Social Security is one of the most effective tools to address this crisis. We should increase benefits across the board, and improve Social Security’s annual cost-of-living adjustment to account for the higher health care costs faced by seniors. It is vital that we flatly reject any proposal to cut Social Security, whether through reductions in the benefit formula, retirement age increases, or any other alteration that would cut benefits to retirees, workers with disabilities or their families. We also should strengthen Social Security’s financing by getting rid of the cap on taxable earnings ($118,500 today) and consider broadening the sources of income that support benefits. Raising wages and reducing income inequality also would bolster Social Security’s finances for the long term.

Another powerful tool for retirement security is the defined-benefit pension, which are designed to provide workers with a secure and adequate lifetime retirement benefit. Intentionally or not, however, both governmental and nongovernmental policy makers have been complicit in undermining pensions and have created incentives for employers to cut or abandon them.

Protecting pensions—both those that remain in the private sector and those that still are prevalent among public employees—will require undoing the funding and accounting rules that have stacked the deck against these plans. For single-employer plans in the private sector, the Pension Protection Act of 2006 (PPA) created unnecessary volatility and uncertainty in pension funding requirements. This needs to be fixed permanently. In addition, federal lawmakers must stop using pensions as a piggy bank to pay for other priorities with ad hoc changes in tax and funding rules, and repeated increases in Pension Benefit Guaranty Corp. (PBGC) premiums. Proposals that license the PBGC to set its own premium rates are a nonstarter, as are shortsighted premium increases that jeopardize workers’ retirement security by diverting resources needed to fund those plans. PBGC’s obligations should be backed by the full faith and credit of the federal government. At the state and local level, we must hold accountable the political leaders who cynically underfund pensions and then call for benefit cuts to address the shortfalls.

While current law allows the PBGC to facilitate multiemployer plan mergers and partitions in appropriate situations as a means to protect workers’ and retirees’ benefits, we encourage Congress to ensure the agency has the necessary authority and resources to use these important tools.

We must put an end to bankruptcy being used either to shed employers’ pension obligations or to protect creditors and bondholders at the expense of workers and retirees. Pension obligations should be given a higher priority in bankruptcy, and workers should be granted a separate claim in bankruptcy court for lost pension benefits.

The shortcomings of 401(k) plans are numerous and widely acknowledged. Too many workers do not contribute or do not contribute enough. Fees and expenses are too high. Workers must make crucial investment decisions with bad advice or none at all, and face major risks involving capital markets and interest rates. At retirement, individuals encounter high hurdles in making their savings last throughout their lives.

Some policy makers had hoped that encouraging tweaks to 401(k) plan designs, like automatic enrollment, would be a silver bullet for many of these problems. It is now apparent, however, that much bigger changes are required. This should come as no surprise, because these failures are rooted in the very reasons why employers moved away from defined-benefit pensions in the first place—to shift the onus for funding benefits, the duty to invest account assets, and responsibility for investment, interest rate and mortality risks from employers to workers.

Greater transparency and  lower fees and expenses should be priorities for policy makers. As with pensions, workers need greater protections in bankruptcy for 401(k) contributions employers fail to deposit in the plan, and against the losses that can come from having too much invested in employer stock. The Department of Labor must move forward, without any interference from Congress, in implementing strong rules for fiduciary investment advice given to 401(k) participants and IRA owners, and protecting against harmful conflicts of interest.

And we must close the loophole that allows the very wealthy—particularly, company founders, investment bankers and venture capitalists—to use retirement accounts to shelter vast amounts of assets and income. Congress should consider excluding non-publicly available securities from IRAs, as well as other measures to address these abuses.

While no alternatives are in wide use today, 401(k)s should not and cannot be the only option working people have, if left without a defined-benefit plan. If we are to address the retirement crisis, we need new plan designs to serve the best interests of workers and retirees by maximizing their retirement income. We are committed to working with policy makers and others to develop options that provide for shared responsibility between employers and workers for investment and interest rate risk; employer contributions for all eligible workers; pooled, professionally managed, low-fee investments; guaranteed lifetime income; portability; and a strong role for workers in plan governance.

With slim prospects for meaningful federal change anytime soon, some states are attempting to set up their own retirement plans and savings programs. States can play a useful role by targeting workers who currently do not have access to a retirement plan at work.

Nevertheless, federal law limits what states can do; for example, states cannot require employer contributions. As a result, these efforts will have far less impact than if Congress itself took responsibility for addressing the retirement security crisis facing working people. State-established approaches that rely on each worker to fund his or her own Individual Retirement Account (IRA), albeit through mandatory automatic enrollment, could repeat many of the shortcomings of 401(k)s. Therefore, it will be important for states to adopt best practices that maximize the security, efficiency and cost effectiveness of these savings programs. State-sponsored multiple employer plans are more likely to deliver adequate and secure retirement benefits because they permit employer contributions, may include lifetime annuity payments and can be operated more efficiently. The plans also are covered by federal pension law, including its strict fiduciary standards, spousal protections and disclosure requirements.

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