The Senate Special Committee on Aging convened this week to discuss the projected U.S. retirement income gap, valued by speakers at close to $8 trillion; despite the massive shortfall, optimism was in pretty good supply.
U.S. Senators Susan Collins and Claire McCaskill, respectively the Republican Chairman and Ranking Member of the Senate Special Committee on Aging, hosted the meeting in Washington, D.C. According to the two senators’ opening commentary, as of 2015, the difference between what people have saved and what they will need to live in retirement “was a staggering $7.7 trillion.”
“This serious gap is concerning workers across our country, 82% of whom say their generation will have a much harder time achieving financial security compared to their parents’ generation,” Senator Collins suggested, citing figures from the Bipartisan Policy Center. “According to the Center for Retirement Research, there is an estimated $7.7 trillion gap between what Americans have saved for retirement and what they will actually need. Making matters worse, the Federal Reserve found that nearly half of individuals do not have enough savings to cover an emergency expense of $400. That’s not even enough to buy new tires for a car.”
Making matters worse is that many people are withdrawing from their retirement accounts just to pay unexpected expenses, said Senator Collins, adding that neither political party “has a monopoly on good ideas to address this crisis.”
With these issues in mind, the hearing examined the findings of a two-year study conducted by the Bipartisan Policy Center’s (BPC) Commission on Retirement Security and Personal Savings. Former Senator Kent Conrad and James Lockhart III, who serve as co-chairs of the Commission, testified about the BPC Commission’s work to identify recommendations that could increase and improve retirement savings.
NEXT: Specific recommendations to the committee
According to Lockhart and Conrad, improving access to workplace retirement savings plans will obviously be a cornerstone of closing the retirement income gap, but so will be promoting purely personal savings for short-term needs. In other words, a holistic approach is needed that considers the challenges and importance of both short- and long-term savings.
“This is the only way of truly preserving retirement savings for older age,” the pair explained, “and it is equally important to facilitate lifetime-income options to reduce the risk of outliving savings.”
Lockhart and Conrad told the senators they are strongly supportive of creating new approaches that resemble open multiple employer plans, or open MEPs.
“That would dramatically simplify the process of offering automatic-enrollment plans for small businesses,” they suggested. “In particular, we have outlined a version we call Retirement Security Plans, which would allow employers with fewer than 500 workers to band together and form well-run, low-cost retirement plans that defuse administrative expenses. Responsibility for operating and overseeing these plans would fall to a third-party administrator that would be certified by a new oversight board designed to protect consumers from bad actors.”
Once these new and enhanced types of plans have been available to employers for several years, Lockhart and Conrad recommend the “establishment of a national minimum-coverage standard that would require all businesses with at least 50 employees to offer their workers some form of workplace retirement savings option.” The burden on employers would be minimal, they suggested—limited to selecting a plan (which could be a Retirement Security Plan, a standard 401(k) plan, a defined benefit plan, or even a myRA) and forwarding employees' contributions to the plan administrator.
“No match would be required and employers would have no fiduciary responsibilities,” they said. “A national minimum-coverage standard would also pre-empt an emerging patchwork of requirements at the state level, easing the process for businesses that operate across state lines.”
NEXT: Facilitating lifetime income in DC plans
Another interesting suggestion from the pair was that Americans should be encouraged to “consider the use of home equity for retirement consumption.”
“Many Americans are home-rich, cash-poor,” they said, “meaning that their home is their largest asset. Americans own more than $12.5 trillion in home equity, almost as much as the $14 trillion they have in retirement savings.”
The pair recommended policies that would encourage individuals to preserve equity in their home during their working years and then make use of that equity to provide them with a more secure retirement: “We discourage the use of home equity for pre-retirement consumption by removing the deduction for interest on second mortgages and other lines of credit that reduce home equity before retirement. Individuals would still be able to take such loans, but the federal government should not be subsidizing this practice with an expensive tax expenditure. We also recommend expanding awareness of Federal Housing Administration (FHA)-insured reverse mortgages and establishing a low-dollar reverse-mortgage pool, allowing retirees to tap into a smaller portion of their home equity without incurring the large fees that accompany larger loans.”
Once workers reach retirement, they face the daunting prospect of making their savings last for the rest of their lives, Conrad and Lockhart said. With Americans increasingly living into their 80s and 90s, this challenge has only become more difficult.
“Currently, more than four in 10 Generation Xers are projected to run short of money in retirement,” they warned. “Our recommendations would ensure that fewer retirees outlive their savings. In addition to greater accumulation of assets, many older Americans are in need of sustainable retirement incomes. We would reduce legal risk for plan sponsors and encourage them to offer their participants better options to turn their savings into a monthly stream of income.”
One of the safe harbors they recommended would “apply to plan sponsors that make it easy for savers to purchase annuities over time, an approach known as laddering.”
“This helps savers turn their savings into guaranteed monthly income for life while protecting them from volatility in interest rates. Employers would also be explicitly permitted to require savers to make an affirmative decision from a personalized menu about how they want to withdraw their savings, known as an active-choice framework,” the pair concluded. “No participant would be forced to take lifetime income, but everyone would have to confront the option before accessing their savings.”
The pair’s full prepared testimony is available here.