Americans may be evenly divided over whom they will cast their vote for president in the November elections, but there's one issue on which the vast majority of citizens agree: They're afraid they can't afford to retire.
Most of your clients are probably among the estimated 25% of U.S. workers who have amassed adequate savings through their workplace-based retirement plans and IRAs. But the majority of Americans aren't doing so well and that's becoming abundantly clear as the first generation of workers to depend primarily on 401(k) plans—rather than increasingly rate defined-benefit pension plans—start to retire.
“For most of the middle class, the dream of a secure retirement is slipping out of reach,” Sen. Tom Harkin (D-Iowa), said as he gaveled his Committee on Health, Education, Labor and Pensions (HELP) into session last week for a discussion among business and labor representatives and academic researchers of how to improve retirement security for 21st century workers.
“This disappearance of pensions has had a profoundly negative impact on retirement security in this country,” Harkin said, noting that only 20% of private sector workers are covered by a defined benefit pensions plan today, down from about 50% thirty years ago. “It's made even worse by the fact that the middle class is being squeezed between stagnant wages and rising costs,” he said, pointing out that half of all Americans workers have saved less than $10,000 and many nothing at all. “We are facing a retirement crisis.”
Collectively, Americans have racked up what the Center for Retirement Research at Boston College has dubbed the retirement income deficit. That's the $6.6 trillion shortfall between what people have saved for retirement and what BCC estimates that they should have saved by now.
Although your clients have demonstrated that a 401(k) plan can be effective way to save for retirement — assuming you have access to a plan at work, can afford to earmark a portion of each paycheck for retirement, make wise investment decisions, hold down fees and stay invested when the stock market looks like a rollercoaster. But most of these savings plans don't offer good solutions for creating steady income in retirement.
Consequently, there is growing interest at both the state and federal level to harness the best features of traditional pension plans that provide professional investment management, economies of scale and income for life with the portability of a 401(k) for today's job-hopping workforce.
Unfortunately, a desire to fix the private retirement system is running headlong into the reality of crushing budget deficits. Many in the financial services industry fear that an effort to provide more security for lower-and moderate-income workers will prompt congressional tax writers to redistribute existing tax expenditures. Some proposals would cap tax-deferred 401(k) contribution limits below current levels. Others would swap tax deductions for tax-credits designed to help the working poor.
The various stakeholders in the retirement security debate agree that a traditional defined benefit plan is the most cost-effective way to deliver secure retirement income to workers and an efficient way to pool investment, longevity and interest-rate risks. They also agree that one of the biggest failings of the current voluntary retirement system is that about half of all workers are not covered by any retirement plan. But the agreements end there. Some labor groups want mandatory retirement coverage for all. Business insists that retirement plans remain voluntary and suggest improving the current system rather than scrapping it.
The senator from Iowa recently proposed his own hybrid pension plan for workers who aren't covered by an existing retirement plan. Under his Universal, Secure and Adaptable (USA) Retirement Funds proposal, there would be universal access to USA Retirement Funds through the existing payroll withholding system. USA Retirement Funds would pool and professionally manage assets and relieve employers of any investment management responsibilities or financial risk. Although Harkin pledged to vigorously pursue his proposal when Congress reconvenes next year, legislators have a long to-do list, and based on this year's meager accomplishments, face an uphill battle over any major legislative reforms.
But some states aren't waiting for Washington to act. The California legislature recently passed a bill to create a savings plan that would cover the state's 6.3 million private-sector workers who have no retirement coverage at work. If signed by Governor Jerry Brown, it could serve as a model for other states to address the problem of inadequate retirement savings that threaten American families, communities and the nation's social safety net.
As the New York Times said in a recent editorial in favor of the bill, "One of the advantages of the plan is that pooled contributions and professional management would reduce administrative costs and investing mistakes, which would boost returns beyond what most 401(k) investors achieve on their own” (www.nytimes.com/2012/09/23/opinion/sunday/california-takes-on-the-retirement-crisis.html?_r=0). But at this point, I wouldn't worry about losing your job shepherding your clients' retirement investments. It could take years, if not decades, to move this ball forward.
Up until now, the decline in traditional defined-benefit pension plans has been written off as inevitable. The debate has focused on how costly pension plans are to employers, particularly as volatile stock markets and record-low interest rates have forced plan sponsors to dump even more money into the plans to satisfy minimum funding requires. And traditional pension plan-designs may be unsuitable for many of today's workers who seldom stick with one job long enough to accumulate significant retirement benefits
But the real loser in the age of disappearing pension is the U.S. economy. Pension plans are able to invest billions of dollars over long time horizons, in good times and in bad. Harkin noted that pensions make the kind of consistent, long-term investment in the U.S. economy that spur innovation and create jobs. As pensions disappear, so will a stabilizing force in our capital markets. And maybe that's reason enough to take another look at pensions.
Under the old pension plan system, the employers bore all the risks. With today's 401(k)s, the burden has shifted to employees. Perhaps recent efforts to reimagine pensions in a way that shares the risks and burdens among employers, workers and the government might actually work.