Sen. Tom Harkin, D-Iowa, on Friday proposed a way to bolster retirement savings at work, plus a series of improvements to Social Security.
The proposal was outlined in a report released by Mr. Harkin, chairman of the Senate Committee on Health, Education, Labor and Pensions, slugged “The Retirement Crisis and a Plan to Solve It.”
“After a lifetime of hard work, people deserve the opportunity to live out their golden years with dignity and financial independence,” he wrote. “But for most of the middle class, the dream of a secure retirement is slipping out of reach.”
Mr. Harkin's concept is a two-pronged effort. The first will create the Universal, Secure and Adaptable Retirement Funds, a private pension plan to which workers will have universal access. The USA Retirement Funds, which will be privately run and professionally managed, will function as a supplement to defined-contribution plans and aren't intended to replace existing pensions. They will also be portable.
Workers will be able to access the savings plan and pool their assets through their employers' existing payroll withholding system, Mr. Harkin wrote. Further, each USA Retirement Fund will be overseen by a board of trustees consisting of qualified employee, retiree and employer representatives.
Though the trustees are acting as fiduciaries, employers won't be held to fiduciary responsibility when it comes to choosing, administering or managing the funds. Rather, the employers' only obligation is to enroll workers automatically, ensure that the employees' contributions are processed, and make modest contributions.
Investment and longevity risk tied to traditional defined-benefit plans have hampered employers and are major reasons why companies are looking to get rid of them. Mr. Harkin hopes to address these issues by allowing the USA Retirement Funds to spread pension risks over a greater number of lives — large groups of employees and retirees.
There is also a lifetime-income benefit: Participants earn a monthly income benefit that will be determined based on the amount of contributions made by or on the behalf of the participant, plus investment performance over time, according to the proposal. Low-wage workers will be eligible for refundable retirement savings credits that can be contributed to a USA Retirement Fund. The proposal doesn't mention whether this lifetime-income benefit has an insurance component.
Naturally, not all companies offer a retirement plan. Those that don't will have to withhold a portion of their employees' pay automatically and send the money to a USA Retirement Fund that's either chosen by the employer or that's a “default” fund identified for that region, industry or through collective bargaining, Mr. Harkin wrote.
The second part of the proposal strengthens Social Security through a series of measures.
One step will improve the program's financing by phasing out the cap on wages subject to the payroll tax over 10 years. This means income over $110,100 will be subject to the payroll tax.
The changes also will adjust the way Social Security payments are calculated. For instance, the benefits are based on a progressive formula that replaces a set percentage of income at three levels. The replacement factor for a person's first $767 of average indexed monthly earnings is 90%. This drops to 32% for AIME between $767 and $4,624, and it falls to 15% for AIME that's between $6,624 and $8,532.
Mr. Harkin proposes raising the replacement factor for the first bracket by 15% over 10 years. “It will have an especially profound effect for those in the middle and at the bottom of the income distribution,” he wrote.
He also proposed changing the cost of living adjustment, tying increases to the Consumer Price Index for the Elderly, instead of the Consumer Price Index for all Urban Wage Earners. The CPI for the Elderly is based on households whose head or spouse is over 62.
In the meantime, Mr. Harkin is seeking comments from the public on his ideas.
Major retirement industry groups so far are familiar with the proposal but have not formulated comments yet. “We're still reviewing this one, so we cannot say much at this stage beyond that,” said Ianthe Zabel, a spokeswoman for the Investment Company Institute.
“The report makes a compelling case for a new private retirement system that would provide a meaningful supplement to Social Security for the millions of employees whose employers do not offer pensions or retirement savings plans,” said Karen Friedman, executive vice president and policy director of the Pension Rights Center.
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