Three ways to help Americans secure their financial future
Part 2 in a series detailing recommendations from the Commission on Retirement Security and Personal Savings
In my last post, I listed six key challenges facing Americans as they save for retirement, as identified by the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings (of which I am a co-chairman). I also discussed the commission’s recommendations on ways to address three of those challenges: limited access to workplace retirement savings plans, insufficient personal savings for short-term needs and the risk of outliving retirement savings. In this post, I discuss the commission’s proposed solutions to the final three challenges to saving for retirement.
1. Challenge: Many Americans fail to build and leverage the home equity they need to support their retirement security.
Recommendation: Facilitate the use of home equity for retirement consumption.
Housing is an important form of savings. Americans own more than $12.5 trillion in home equity — a sum that rivals the $14 trillion that Americans hold in retirement savings.1,2 For individuals or couples who lack substantial savings in a retirement plan but who own their residences, homeownership can be a major source of retirement security. A variety of mechanisms exist for tapping home equity to fund regular consumption needs in retirement; for example, homeowners can downsize, use a reverse mortgage, or sell their home and rent instead.
Federal and state tax policy, however, actually subsidizes the use of home equity for pre-retirement consumption, leaving many retired homeowners burdened with debt and with less equity to support retirement security. The commission recommends ending these subsidies by eliminating tax benefits for borrowing that reduces home equity.
The commission also proposes to strengthen programs and advise consumers on reverse mortgages, which may be a good option for some older Americans. Establishing a low-dollar reverse mortgage option would facilitate smaller loans while reducing fees for borrowers and risk for taxpayers.
2. Challenge: Few Americans have the personal finance knowledge they need to save for retirement.
Recommendation: Improve financial capability among all Americans.
Financial capability — defined as having the knowledge, ability and opportunity to manage one’s own finances — is lacking among too many Americans.3,4 This is a troubling fact at a time when the nation’s retirement system has transitioned toward greater individual control and responsibility.
Exposure to financial knowledge and planning should begin early in life, with schools, communities, employers, and federal and state governments all working to foster a culture of savings and to position individuals to make prudent financial choices. The commission supports a variety of approaches, including implementing recommendations from the president’s Advisory Council on Financial Capability, providing improved personal financial education through K-12 and higher-education curricula, and better communicating the consequences of claiming Social Security early.
3. Challenge: Our current Social Security system has not kept up with the needs of today’s retirement savers.
Recommendation: Strengthen Social Security’s finances and modernize the program.
Social Security provides the income foundation for many older Americans, but to maintain that legacy, prompt adjustments to the program are needed. For decades, the program’s trustees have affirmed the need for changes, noting that Social Security faces significant financial challenges.
The commission recommends adjustments to Social Security’s tax and benefit levels to 1) reflect changing demographics; 2) better target benefits toward those who are most vulnerable in old age, including surviving spouses and workers in low-earning occupations; 3) preserve reasonable intra- and inter-generational equity; and 4) more fairly reward work.
The commission’s recommendations aim to bring peace of mind to Americans preparing for retirement by assuring the financial sustainability of the Social Security program and by significantly expanding access to workplace retirement savings plans. Together, these changes would help many more workers take charge of their financial futures.
Read part 1 in the series: Six key retirement challenges facing Americans today
1 Source: Board of Governors of the Federal Reserve System, Financial Accounts of the United States: Fourth Quarter 2015
2 Source: Investment Company Institute, The U.S. Retirement Market, Fourth Quarter 2015
3 Source: Investor Education Foundation, 2012 National Financial Capability Study
4 Source: Center for Social Development, “Financial Capability: What is It, and How Can It be Created?”
Blog header image: Kamira/Shutterstock.com
Intra-generational equity refers to equity between people of the same generation, while inter-generational equity refers to equity between present and future generations.
The Bipartisan Policy Center (BPC) is a non-profit organization that combines the best ideas from both parties to promote health, security and opportunity for all Americans. BPC drives principled and politically viable policy solutions through the power of rigorous analysis, painstaking negotiation and aggressive advocacy.
This content is a product of BPC’s Commission on Retirement Security and Personal Savings. The findings expressed herein are those solely of the commission, though no member may be satisfied with every formulation in the report. The findings and recommendations expressed herein do not necessarily represent the views or opinions of the BPC’s founders or its board of directors.
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.