Our retirement system is failing too many Americans and government needs to step up to the plate to provide meaningful legislation which will help facilitate retirement. Employers, workers, and the government should share the responsibility for the retirement security for all Americans. Here are the top 5 areas that I believe our government should focus on:
1. Empower All Americans:
With the transition from defined benefit pension plans to defined contribution plans, Americans are burdened with an investment risk they can’t handle. They don’t have the investment training, experience and wherewithal to take on this shift in responsibility. There is a universal need for financial literacy to help individuals know how much to contribute for their retirement and how to invest their assets.
The Social Security Administration expects that over the next two decades, 80 million Baby Boomers will apply for retirement benefits. Baby Boomers are those Americans born between 1946 and the early 1960s. Commissioner Michael Astrue says the recession is complicating the timetable for some people contemplating retirement. He says some Baby Boomers who suddenly find themselves out of work are opting to take their benefits sooner than they might have while others who still have jobs are deciding to keep working because their 401K plans have shrunk.
While companies are doing some retirement communication, it generally is not universal and does not meet the mark. Our government can help encourage individuals to plan and save for their retirement (especially for those employees who are not covered by any retirement plan.):
– Include with the mailing of each annual tax return form, an easy to understand guide to retirement planning and investment.
– Include a link on the guide for recommended retirement planning software that is cost effective, comprehensive and easy to use.
– Consider implementing a government sponsored, universal, and voluntary savings plan for all Americans that would provide a secure incentive for those not covered by an employer plan at a reasonable cost and with passive investment in low-cost index funds. Require employers who do not offer retirement plans to set up automatic payroll deductions into their employee’s individual account and provide a 4% of pay employer contribution. Boost participation by having workers opt out rather than opt in. Distributions would only be made at retirement in the form of a cost-of-living annuity (50% to spouse in the event of the individual’s death).This would provide a steady retirement income for life.
2. Social Security Needs a Permanent “Fix”:
The 80 Million baby boomers will put incredible pressure on Social Security funding levels. There are only three ways to fix the problem: raise taxes, reduce spending, or make the current payroll taxes work harder by investing them in higher yielding securities.
– Raise taxes: Lawmakers could (1) increase the amount of income subject to the payroll tax that funds Social Security, (2) increase the tax rate on that income, or (3) tax all Social Security benefits.
– Lower benefits: Choices include deferring the retirement age, lowering benefits, and lowering the cost-of living adjustments.
– Improve Investment: Invest payroll taxes in a diversified portfolio of higher yielding securities.
While the choices are many, the solution will likely include some combination of all of the ones listed above. The longer legislators wait, the more dramatic the changes must be.
3. Medicare Also Needs a Permanent “Fix”:
Soaring health-care costs are driving entitlements to grow at a rate much faster than the U.S. economy over the next several decades – by an average of 3% more than the U. S. economy. More than 85 million Americans rely on Medicare and another 80 million baby boomers are around the corner. As with Social Security, raising taxes and/or lowering benefits need to be looked at seriously.
4. Encourage Rather Than Discourage Defined Benefit Plans:
Our government is fostering a policy that encourages the freezing and termination of defined benefit pension plans. The Pension Benefit Guarantee Corporation (“PBGC”) is a government agency which takes over terminated pension plans which are unfunded. The PBGC last reported under funding at over $25 billion. The PBGC had estimated that it faced about $100 billion in possible liabilities from firms with junk-bond credit ratings and a reasonable chance of pension plan termination. The recent economic crisis and the stock market decline required legislation to help the beleaguered financial, auto and airline industry. This will improve the situation somewhat but has not solved the problem. Here are some things the government could do to help future retirees meet their dreams and encourage the creation and continuation of defined benefit pension plans:
– Eliminate all PBGC premiums for company plans where assets exceed liabilities under PBGC assumptions. Companies should not be penalized for properly funding their plans.
– Eliminate the cap on tax deductible contributions, if the contribution will not over fund the plan on a PBGC basis by more than 20%. This will encourage companies to fund a reasonable cushion of protection.
– Eliminate the excise tax for the first 20% assets in excess of liabilities on a PBGC basis. This will also encourage companies to fund a reasonable cushion of protection.
– Eliminate all limits on an executives’ participation in qualified retirement plans (e.g. no limit on compensation). By encouraging executives to rely on qualified plans for all of their retirement needs, they are in turn encouraged to develop and keep better plans for all employees.
5. Protect sources of retirement income:
Major declines and fluctuations in the values of investment assets and home values mean baby boomers may have far less money than they expected when they retire. They will have to save more, spend less, and work longer in order to meet their retirement dreams. Social Security could be expanded to allow individuals to transfer some or all of their savings plan balances into the Social Security system to “buy”:
– An annuity from the Social Security System as they would from and insurance company but without the costly commissions and profit margins.
– Longevity insurance from the Social Security System (e.g. purchase a deferred annuity at retirement but with benefits that would be payable if and when the Social Security beneficiary or spouse attains age 80).
This would allow individuals to have a stable source of income and take some of the investment and longevity risk off their shoulders, at a reasonable cost without insurance company expenses and profits.