Six key retirement challenges facing Americans today
Part 1 in a series detailing recommendations from the Commission on Retirement Security and Personal Savings
The nation’s retirement system has many strengths, but it is also experiencing challenges. Retirement and savings policies have evolved over the decades into a true public-private partnership. Assets in workplace retirement savings plans and Individual Retirement Accounts (IRAs) have grown dramatically over the last four decades, but too many Americans are still not preparing adequately. Social Security remains the base of financial support in old age for most Americans, yet the program faces substantial financing problems. A long history of bipartisanship built these systems to promote savings and improve retirement security, but much work lies ahead.
To address these challenges, the Bipartisan Policy Center (BPC) launched the Commission on Retirement Security and Personal Savings in 2014. Over the last two years, the 19-member commission (for which I serve as co-chairman) has carefully reviewed the issues and explored many potential approaches to boost savings and strengthen retirement security. The commission is encouraged that the issues of savings and retirement security have attracted bipartisan interest among business leaders, the media, elected officials in Congress, the administration and the states, as well as from candidates seeking public office. The commission hopes that its recommendations will contribute to meaningful action by individuals, businesses and government to achieve a secure retirement future for all Americans.
Tectonic shifts in demographics, policy and the marketplace have transformed the US retirement landscape. The most profound change has been an ongoing shift by many employers from defined benefit pensions to defined contribution plans. As a result, the 401(k) — previously an obscure section of the tax code — has become a household term.
Workers have found themselves part of a great experiment — one that has given individuals and families far more control over and responsibility for financing their own retirement, and simultaneously has exposed them to greater risk.
Today, more than in the past, personal responsibility is of central importance in retirement preparedness. Individuals and families can’t afford to take a passive approach to retirement savings — but that doesn’t mean savers should be or can be on their own. People need the assistance of a well-designed system as they accumulate, invest and spend their retirement savings. Public policy has a critical role to play in facilitating savings and a secure retirement.
With this in mind, the commission has addressed six key challenges that impact Americans’ ability to prepare for retirement:
- Many Americans’ inability to access workplace retirement savings plans
- Insufficient personal savings for short-term needs, which too often leads individuals to raid their retirement savings
- Risk of outliving retirement savings
- Failure to build and use home equity to support retirement security
- Lack of basic knowledge about personal finance
- Problems with Social Security, including unsustainable finances, an outdated program structure and failure to provide adequate benefits for some retirees
I’ll dive deeper into these challenges, along with the commission’s recommendations for establishing a better savings culture, in a two-part blog series on retirement savings.
1. Challenge: Many Americans have limited access to workplace retirement savings plans.
Recommendation: Improve access to workplace retirement savings plans.
Too many Americans, especially those who work for small businesses, lack access to a payroll-deduction workplace retirement savings plan.
The commission recommends the creation of a new, streamlined option called Retirement Security Plans that would allow small employers to transfer most responsibilities for operating a retirement savings plan to a third-party expert, while still maintaining strong employee protections. It would also enhance the existing myRA retirement savings program to provide a base of coverage for those workers, such as part-time, seasonal and low-earning workers, who are least likely to be offered a retirement savings plan.
Other workers have access to retirement savings plans but do not contribute. The commission proposes an alternative to nondiscrimination testing, along with new tax incentives to encourage employers to adopt automatic enrollment and escalate their employees’ contributions over time. Once these reforms are in place, it recommends establishing a nationwide minimum-coverage standard to pre-empt the patchwork of state-by-state regulation that is already developing.
A variety of additional reforms could support greater access to retirement savings plans and improve the experience of plan participants. The commission would encourage lower-earning individuals to save for retirement by improving the existing Saver’s Credit for younger workers and by exempting some retirement savings from asset tests to qualify individuals for certain federal and state assistance programs.
The commission recommends several additional actions, including the creation of a Retirement Security Clearinghouse to help Americans consolidate their retirement savings, steps to limit overexposure to company stock and modest adjustments to retirement tax expenditures.
2. Challenge: Many Americans lack sufficient personal savings for short-term needs and must dip into their retirement savings instead.
Recommendation: Promote personal savings for short-term needs and preserve retirement savings for older age.
Americans need to increase their personal savings so that they are better positioned to handle emergencies and major purchases. Insufficient short-term savings can lead workers to draw down their retirement accounts, incurring taxes and (often) penalties. While it might address an immediate financial squeeze, this “leakage” of retirement savings jeopardizes many Americans’ long-term retirement security. To address this issue, the commission recommends clearing barriers that discourage employers from automatically enrolling their employees in multiple savings accounts, one for short-term needs and another for retirement.
Some leakage of retirement savings results from system complexity and poorly designed regulation. The commission proposes to ease the process for transferring savings from plan to plan, because many pre-retirement withdrawals occur upon job separation. In addition, early-withdrawal rules and penalties for workplace plans and IRAs should be harmonized by raising IRA standards.
3. Challenge: Many Americans fear they’ll run out of retirement savings.
Recommendation: Reduce the risk of outliving savings.
While Social Security provides a form of lifetime income, Social Security benefits alone will not be adequate to meet all income needs for most retirees. For those who have accumulated sufficient savings, other lifetime-income solutions offer the security of additional, regular retirement income that they cannot outlive.
The commission recommends that plan sponsors integrate sophisticated, but easy-to-use, lifetime-income features within retirement savings plans. Plan sponsors could establish a default lifetime-income option or offer an active-choice framework in which participants are asked to choose options from a customized menu.
In-plan tools could also help participants make an informed decision about when to claim Social Security benefits and then to schedule withdrawals from their retirement plan to facilitate later claiming of Social Security benefits. The commission believes employers need safe harbors to limit their legal risk as they offer these features and attempt to educate workers about longevity risk and lifetime income.
Additionally, the commission recommends clearing barriers to offering a wider array of choices for lifetime income in both retirement savings and pension plans. Workers with defined benefit pensions should be able to receive part of their benefit as a lump sum and the rest as monthly income for life, rather than the all-or-nothing choice most have today. To encourage participants to work longer and provide more consistent work incentives, the commission recommends allowing employer-sponsored retirement plans to align plan retirement ages with Social Security.
In the second part of this series, I’ll cover three more recommendations for improving the way Americans save for retirement, from facilitating home equity usage to modernizing the Social Security program.
Read part 2 in the series: Three ways to help Americans secure their financial future
Blog header image: PhotoSerg/Shutterstock.com
WL Ross & Co., LLC is an investment adviser and WL Ross & Co., LLC and Invesco Distributors, Inc. are both indirect, wholly owned subsidiaries of Invesco Ltd.
James B. Lockhart III
Vice Chairman, WL Ross & Co. LLC, an Invesco company
Co-Chairman, Commission on Retirement Security and Personal Savings
James B. Lockhart III is the Vice Chairman of WL Ross & Co. LLC, where he is a member of the Management Committee, oversees the financial services investment team and serves on investment committees, including the two mortgage funds.
Prior to joining WL Ross & Co. LLC in 2009, Mr. Lockhart served as the director of the Federal Housing Finance Agency and chairman of its Oversight Board, and was the director of its predecessor agency, the Office of Federal Housing Enterprise Oversight. He also served on the Financial Stability Oversight Board, overseeing the Troubled Asset Relief Program. Mr. Lockhart was principal deputy commissioner and chief operating officer of the Social Security Administration and executive director of the Pension Benefit Guaranty Corporation.
Mr. Lockhart’s private sector financial services experience includes senior positions at an investment bank, reinsurer, insurance broker, risk management firm and major oil company. He also served as a lieutenant (j.g.) in the US Navy aboard a nuclear submarine. Mr. Lockhart earned an MBA from Harvard University and a BA from Yale University. He is a director of Bank of the Cascades, Shellpoint Partners and the Bruce Museum. In 2009 he received The American Financial Leadership Award from the Financial Services Roundtable. He is a fellow of the Association of Corporate Treasurers in the UK. He serves as co-chair of the Bipartisan Policy Centers’ Commission of Retirement Security and Personal Savings.